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

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

FEBRUARY 16, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–2 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

PATRICK T. MCHENRY, North Carolina 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

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 

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 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

SEAN P. DUFFY, Wisconsin, Chairman 

DENNIS A. ROSS, Florida, Vice Chairman 

EDWARD R. ROYCE, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

KEITH J. ROTHFUS, Pennsylvania 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

THOMAS MacARTHUR, New Jersey 

TED BUDD, North Carolina 

EMANUEL CLEAVER, Missouri, Ranking 

Member 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

JOYCE BEATTY, Ohio 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

RUBEN KIHUEN, Nevada 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 16, 2017 ............................................................................................ 1 

Appendix: 

February 16, 2017 ............................................................................................ 39 

WITNESSES 

THURSDAY, FEBRUARY 16, 2017 

Chamness, Charles, President and Chief Executive Officer, National Association of Mutual Insurance Companies (NAMIC) ................................................. 9 

McRaith, Michael T., former Director, Federal Insurance Office (FIO), U.S. 

Department of the Treasury ................................................................................ 4 

Nickel, Hon. Ted, Commissioner, Office of the Commissioner of Insurance, 

State of Wisconsin, on behalf of the National Association of Insurance 

Commissioners (NAIC) ........................................................................................ 6 

Pusey, Leigh Ann, President and Chief Executive Officer, American Insurance 

Association (AIA) .................................................................................................. 7 

APPENDIX 

Prepared statements: 

Chamness, Charles ........................................................................................... 40 

McRaith, Michael T. ......................................................................................... 49 

Nickel, Hon. Ted ............................................................................................... 59 

Pusey, Leigh Ann ............................................................................................. 66 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Duffy, Hon. Sean: 

Letter from the American Agricultural Insurance Company ....................... 71 

Written statement of the American Council of Life Insurers ....................... 73 

Letter from Chubb Global Government Affairs ............................................. 77 

Written statement of the Cincinnati Insurance Companies ......................... 79 

Letter from Lloyd’s America, Inc. ................................................................... 81 

Letter from the OdysseyRe Group .................................................................. 82 

Letter from the Reinsurance Association of America .................................... 84 

Letter from the Transatlantic Reinsurance Company ................................... 86 

Heck, Hon. Denny: 

Letter from the Intergovernmental Policy Advisory Committee on Trade .. 90 

Chamness, Charles: 

Written responses to questions for the record submitted by Representatives Duffy and Luetkemeyer ....................................................................... 91 

McRaith, Michael T.: 

Written responses to questions for the record submitted by Representatives Duffy and Hultgren ............................................................................. 95 

Nickel, Hon. Ted: 

Written responses to questions for the record submitted by Representatives Duffy and Luetkemeyer ....................................................................... 104 

Pusey, Leigh Ann: 

Written responses to questions for the record submitted by Representative Duffy ....................................................................................................... 108 

(1) 

ASSESSING THE U.S.–E.U. 

COVERED AGREEMENT 

Thursday, February 16, 2017 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING

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

The subcommittee met, pursuant to notice, at 10:07 a.m., in room 

2128, Rayburn House Office Building, Hon. Sean P. Duffy [chairman of the subcommittee] presiding. 

Members present: Representatives Duffy, Ross, Royce, Pearce, 

Posey, Luetkemeyer, Hultgren, Rothfus, Zeldin, MacArthur, Budd; 

Cleaver, Velazquez, Sherman, Lynch, Beatty, Kildee, Delaney, and 

Kihuen. 

Ex officio present: Representative Hensarling. 

Also present: Representatives Green and Heck. 

Chairman DUFFY. The Subcommittee on Housing and Insurance 

will now come to order. Today’s hearing is entitled, ‘‘Assessing the 

U.S.–E.U. Covered Agreement.’’ 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Also, without objection, members of the full Financial Services 

Committee who are not members of the subcommittee may participate in today’s hearing for the purposes of making an opening 

statement and questioning the witnesses. 

The Chair now recognizes himself for 4 minutes for an opening 

statement. 

I first want to welcome our members to the first hearing of the 

Housing and Insurance Subcommittee in the 115th Congress. I am 

pleased to have the opportunity to work with Mr. Cleaver, our 

ranking member, and my vice chairman, Mr. Ross. We have a full 

agenda this year, including reauthorization of the National Flood 

Insurance Program, GSE reform, and many other priorities. 

I had not intended our first hearing to be on the U.S.-E.U. covered agreement, but given the 90-day layover period, which just 

began a month ago, it is our duty to study the agreement, to solicit 

feedback from the insurance industry, to assess its impact on policyholders, and ultimately, to weigh in on its merits. 

I have been listening to many stakeholders, some of whom we 

will hear from today, about the merits and the demerits of this 

agreement. Those points notwithstanding, I must say that I come 

from a place of a skepticism over this agreement that was signed 

or put into effect on Friday the 13th with just 1 week left in the 

2 

Obama Administration. I would also remind those in the room that 

the centerpiece of Donald Trump’s campaign for President was negotiating better international deals. 

There is no doubt in my mind that President Trump’s election 

weighed heavily on European and American negotiators to get a 

deal done before he took office. The President and his new Treasury Secretary should be afforded the chance to decide for themselves whether to renegotiate or to sign this deal. 

Furthermore, I believe the committee should consider improvements to international insurance negotiations, to enhance the role 

of State insurance regulators like Commissioner Nickel, and the 

role of Congress in that process. This committee has had an interest in international insurance negotiations for some time and has 

expressed concerns about transparency and the potential for statebased regulatory systems to be undermined. 

I would also note that there has been bipartisan attention paid 

to this matter, and I commend Mr. Heck for all of the work he did 

last year to protect our State-based system. So to be blunt, I think 

a 90-day layover is an insult to this institution and does nothing 

more than pay lip service to the notion of congressional consultation and input. 

In the E.U., it is my understanding that there will be at least 

two affirmative votes to approve this agreement. In the U.S., Congress will have no affirmative votes on this deal, much less an ability to easily disapprove of it if we decide to pursue that course of 

action. 

So I look forward to working with my colleagues in a bipartisan 

fashion on this subcommittee to address this issue. 

I now want to recognize my colleague from Florida, the Vice 

Chair of the subcommittee, Mr. Ross, for 1 minute. 

Mr. ROSS. Thank you, Mr. Chairman. And thank you for holding 

this important hearing. 

The U.S. insurance market is the largest and most vibrant of any 

nation in the world. Our market is strongly regulated by the 

States, putting an emphasis on the protection of policyholders. I 

support this system of regulation, which has existed for nearly 150 

years. In the global insurance marketplace, however, regulatory 

systems vary. Recently, the E.U. implemented a directive that has 

created market access barriers for the U.S. insurers. This harms 

U.S. businesses and is a problem for our domestic companies and 

must be addressed. 

Today, we will discuss the covered agreement negotiated between 

the U.S. and the E.U. Ultimately, when I analyze the covered 

agreement, I am focused on its impact on consumers and policyholders. I want to know how this agreement will impact the homeowners and families in my district and the crop insurance premiums of those citrus growers across Florida. I look forward to the 

testimony today and I yield back the balance of my time. 

Chairman DUFFY. The gentleman yields back. It is now my pleasure to recognize the ranking member of the subcommittee, the gentleman from Missouri, Mr. Cleaver, for 5 minutes for an opening 

statement. 

Mr. CLEAVER. Thank you, Mr. Chairman. And I look forward to 

working with you on a number of critical issues. This is, of course, 

3 

just one. And our vice ranking member, Dan Kildee, is also here 

today and will play a major role in whatever we are able to get 

going to the benefit of the country. 

I remember that under Title V of the Dodd-Frank Act, this hearing is supposed to take place along with a consultation. And I see 

the covered agreement as something that enhances and protects 

U.S. insurance consumers and increases, in my estimation, opportunities for U.S. insurance companies and reinsurers. 

Today, it gives us an opportunity to assess the finalized covered 

agreement that has been reached between the U.S. and the E.U. 

regarding international insurance and reinsurance issues. The Federal Insurance Office (FIO) and the United States Trade Representative (USTR) announced their intention to move forward with the 

negotiations in November of 2015. A final agreement was reached 

on January 13th of this year and a copy of the text was submitted 

to the relevant congressional committees, beginning a 90-day layover period. No further action from Congress is required for this 

agreement to go into effect. 

The covered agreement focuses on three areas of prudential supervision: reinsurance collateral; group capital; and exchange of information between supervisory authorities. As we all know, on January 1, 2016, the E.U. began to implement its insurance regulatory 

scheme, commonly known as Solvency II, and U.S. reinsurance 

companies began to be subjected to burdensome and expensive E.U. 

standards as our system was not equivalent to that of the Solvency 

II system. 

The covered agreement works to address this issue and will allow 

U.S. reinsurance companies to be able to continue to operate in the 

E.U. without costly new obligations. Additionally, the covered 

agreement recognizes the U.S. State-based system. And of course, 

having made a commitment a long time ago, I would never do anything, say anything or support anything which would damage our 

State system. I think it has been an integral part of our system of 

insurance and I will do everything that I can to make sure it stays 

that way. 

So I am hopeful that this agreement will provide certainty for 

our insurance system and enhance consumer protection. I know 

there are a number of questions regarding this covered agreement, 

and I look forward to hearing them answered today. Thank you, 

Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. I now want to welcome our panel, our witnesses for today’s hearing. Thank you for 

being here. 

I first want to introduce Mr. Michael McRaith. In 2011, Mr. 

McRaith was appointed as the Director of the Federal Insurance 

Office by former Treasury Secretary Tim Geithner, where he served 

until last month. He is now appearing as a private citizen. Mr. 

McRaith was integral to the negotiation of the covered agreement 

that we are now here to discuss, so we are grateful for his appearance. Immediately prior to his appointment as FIO Director, Mr. 

McRaith served more than 6 years as the Director of the Illinois 

Department of Insurance. 

Next, from probably the greatest State in the Nation, Wisconsin, 

Commissioner Ted Nickel was appointed by Governor Scott Walker 

4 

as Commissioner of Insurance for the State of Wisconsin in 2011. 

In December 2016, Commissioner Nickel was elected as President 

of the National Association of Insurance Commissioners. Commissioner Nickel is also a member of the National Association of Insurance Supervisors. And in 2014, he was appointed to the Federal 

Advisory Committee on Insurance, which serves as an advisory 

committee to the Federal Insurance Office. 

Commissioner Nickel has been actively engaged in the insurance 

industry affairs in Wisconsin. Prior to his appointment, Commissioner Nickel worked for almost 18 years as Director of government 

and regulatory affairs for Church Mutual Insurance Company in 

Merrill, Wisconsin. So I am proud to call Commissioner Nickel a 

friend, but also a constituent. No bias from the chairman here. 

Next, I want to recognize Ms. Leigh Ann Pusey. Ms. Pusey is the 

president and CEO of the American Insurance Association (AIA). 

AIA is the leading property and casualty insurance organization, 

representing more than 325 insurers that write more than $127 

billion in premiums each year. A veteran of the insurance industry, 

Ms. Pusey joined AIA in December of 1996 and was elevated to 

president and CEO in February of 2009. 

And finally, I want to introduce Chuck Chamness, who serves as 

president and CEO of the National Association of Mutual Insurance Companies, or NAMIC, a 1,400-member company property 

and casualty insurance trade association. Mr. Chamness served in 

the first Bush Administration as Deputy Assistant Secretary for 

Public Affairs under HUD Secretary Jack Kemp, before being 

named to his current position in 2003. 

Now, the witnesses will each be recognized for 5 minutes to give 

an oral presentation of their testimony. And without objection, the 

witnesses’ written statements will be made a part of the record. 

Once the witnesses have finished presenting their testimony, 

each member of the subcommittee will have 5 minutes within 

which to ask questions of the witnesses. 

On your table, you will note there are three lights: green means 

go; yellow means you have 1 minute left; and red means your time 

is up. 

And with that, I now recognize Mr. McRaith for 5 minutes for 

his opening statement. 

STATEMENT OF MICHAEL T. MCRAITH, FORMER DIRECTOR, 

FEDERAL INSURANCE OFFICE (FIO), U.S. DEPARTMENT OF 

THE TREASURY 

Mr. MCRAITH. Chairman Duffy, Ranking Member Cleaver, and 

members of the subcommittee, thank you for inviting me to testify. 

I appear on my own behalf as the former Director of Treasury’s 

Federal Insurance Office and as Treasury’s lead negotiator for the 

covered agreement. 

First, thanks to Commissioner Nickel and his colleagues for the 

integral role they played in the negotiations. We created an unprecedented mechanism for State regulators to join our delegation, and 

they attended and participated in person in every negotiation except the final one in Brussels, which they joined by telephone. 

Through a confidential Web portal, State regulators received 

every E.U. document shortly after it arrived, and before any U.S. 

5 

document was sent to the E.U., we shared it with the States and 

then held a conference call with them to receive their feedback. 

State regulators were an essential part of our delegation. 

The issues addressed by the agreement are not new. Reinsurance 

collateral reform and Solvency II implications have been discussed 

in the U.S. for years. The agreement brings closure to these issues. 

While the States have undertaken to reform reinsurance collateral 

requirements, reform that benefits E.U. reinsurers, the States received nothing of benefit for the U.S. industry. Nothing. 

Through the agreement, U.S. reinsurers now have access to the 

entire E.U. market on the same terms as E.U. reinsurers operating 

in the U.S. With respect to U.S. insurer groups, the agreement 

caps the application of Solvency II to the E.U. operations of U.S. 

insurers. To repeat: The agreement affirms that the U.S. supervises its insurance sector as the U.S. deems appropriate. This outcome saves our insurers potentially billions of dollars, preserving 

American jobs and benefiting U.S. industry and consumers. 

States have been developing a group capital calculation for more 

than 2 years. The agreement, which applies only to those insurers 

operating in the E.U. and the U.S., does not prescribe the content 

of that calculation and does not even imply that States should create a holding company capital requirement. That notion, a complete fiction, would completely contravene the entire purpose of the 

agreement. The agreement endorses States for what they do, or in 

the case of group capital, what they have publicly committed to do, 

and gives them 5 years to do it. 

The agreement is cross-conditional. Neither the E.U. nor the U.S. 

receives the benefits without satisfying the conditions. And if a 

question arises, the agreement provides for the resolution. If both 

sides satisfy the conditions within the 5-year period, then the 

terms of the agreement become permanent, final. 

We entered into the negotiations seeking to improve the rigor, 

uniformity, and consumer protections of U.S. reinsurance oversight. 

We sought to endorse the U.S. system. We sought to include the 

U.S. State regulators in a manner without precedent in American 

history. We achieved these goals. 

We sought to remove excessive regulation that neither protected 

consumers nor supported industry. We sought to ensure that U.S. 

insurers operated in the E.U. on a level playing field. We achieved 

these goals, saving our industry potentially billions of dollars. 

While providing equal benefits to the E.U., this covered agreement 

puts America first. Our diverse U.S. insurance sector will no doubt 

always include skeptics, but this is not a time for our predictable 

debate. This is not a theoretical discussion about concepts or statutory prerogatives. This agreement answers real-time questions 

about the allocation of capital by U.S. insurers, about business opportunities for U.S. insurers and reinsurers, and whether U.S. industry operating in the E.U. employs more Americans or fewer. 

Will U.S. industry grow or will it be stifled? Some will continue 

to conjure up the elaborate fictions, but now is the time to skip the 

usual script, to see the real threat to U.S. insurers’ growth and the 

threat to insurance jobs in States around our country, and to show 

American leadership. Now is the time to solve a real problem, and 

this agreement does just that. 

6 

Thanks for your attention. I look forward to your questions. 

[The prepared statement of Mr. McRaith can be found on page 

49 of the appendix.] 

Chairman DUFFY. Thank you. Commissioner Nickel, you are now 

recognized for 5 minutes. 

STATEMENT OF THE HONORABLE TED NICKEL, COMMISSIONER, OFFICE OF THE COMMISSIONER OF INSURANCE, 

STATE OF WISCONSIN, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC) 

Mr. NICKEL. Thank you, Chairman Duffy. Chairman Duffy, 

Ranking Member Cleaver, and members of the subcommittee, 

thank you for the opportunity to testify here today. 

The NAIC is very concerned with the disparate treatment some 

E.U. jurisdictions are imposing on U.S. insurers and is committed 

to working with Congress and the Administration to address this 

important issue. While a covered agreement is one way to resolve 

these issues, we oppose this one. We urge Congress and the Administration, with direct involvement of the States, to expeditiously reopen negotiations with the E.U. to reach an agreement which 

brings finality to these issues and better protects U.S. consumers, 

insurers, and the State regulatory system. 

While we recognize that the United States received some benefits, including the apparent elimination of the local presence requirements, the current agreement does not provide for full equivalence or recognition of our regulatory system. In fact, the word 

‘‘equivalence’’ is nowhere to be found in this document. 

This agreement places conditions on the ability of regulators to 

obtain information or to take certain actions currently authorized 

under State laws. There are potential conflicts between this agreement and State reporting processes, as well as critical examination 

and hazardous financial condition authorities. 

The group capital provisions imply State regulators are required 

to adopt a group capital requirement, but also include language 

suggesting the E.U. could apply its own group capital requirements 

and reimpose local presence requirements if the States choose not 

to act or fail to meet E.U.’s expectations. This is not a win for the 

U.S. insurers and consumers who will have to absorb these costs. 

This agreement does not include any evaluation of the creditworthiness of foreign reinsurers backing up U.S. risks. The Treasury Department had committed that it would never wipe out insurance collateral, yet it did just that. Collateral protects U.S. insurers 

and consumers from counterparty risk. More than $30 billion of 

E.U. reinsurer collateral is eliminated by this agreement. Absent 

that protection, regulators will likely have to find other mechanisms with which to protect insurers and your constituents from 

the risks posed by those counterparties. 

This agreement is also littered with ambiguities to be resolved by 

an undefined and unaccountable joint committee, leading to perpetual renegotiation and uncertainty. In a single agreement with 

an outgoing Administration, the E.U. achieved its primary objective 

of eliminating collateral requirements. 

In return, U.S. companies and our regulatory system received a 

form of probation which could be revoked at any time. The burden 

7 

for this is placed almost entirely upon the States, with its underlying costs ultimately paid for by the U.S. insurers and consumers. 

These defects should be no surprise. This flawed document resulted from a flawed process. Unlike a trade agreement, there was 

no formal consultation with U.S. stakeholders. Despite assurances 

to the contrary, the few of us in the room were merely observers 

subject to strict confidentiality with no ability to consult with our 

fellow regulators. The process favored the E.U., which retains the 

European Parliament’s and Council’s ability to approve the agreement, whereas the U.S. has virtually no comparable congressional 

authority. This agreement sets a precedent that others around the 

world may try to imitate, and forces the U.S. to weaken our standards in exchange for very little. 

Going forward, we would like the Administration to establish a 

transparent process for negotiating and allowing more robust congressional and stakeholder engagement and providing meaningful 

and direct participation by all impacted insurance regulators. 

In terms of specific substantive improvements, the new agreement should provide for permanent mutual recognition, equivalence, or comparable treatment for U.S. firms operating in the E.U. 

It should recognize the U.S. regulatory system, including group supervision and capital, provide clarity in the agreement’s terms, and 

finality in its application. 

In conclusion, we are committed to working toward an agreement 

which is truly in the best interest of the U.S. and brings closure 

to the issue of equivalence, but this is not such an agreement. 

Thank you, Mr. Chairman, and with that, I would be pleased to answer any questions. 

[The prepared statement of Commissioner Nickel can be found on 

page 59 of the appendix.] 

Chairman DUFFY. Thank you, Commissioner. Ms. Pusey, you are 

recognized for 5 minutes. 

STATEMENT OF LEIGH ANN PUSEY, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, AMERICAN INSURANCE ASSOCIATION 

(AIA) 

Ms. PUSEY. Thank you, Chairman Duffy, Ranking Member 

Cleaver, and subcommittee members. I appreciate the opportunity 

to testify today on behalf of our member companies. This is a tremendously important issue to the insurance industry, and it really 

needs immediate attention. 

I can’t tell you how I hate to have to disagree with Commissioner 

Nickel and our leadership at the NAIC. But on this issue, we really 

see it very differently. We see this as a real win for insurers, for 

U.S. insurers. 

This was a win not only for companies operating in the U.S., but 

for our regulatory system. And for that matter, for our consumers, 

who are going to continue to be protected because all the provisions 

of the U.S. regulatory system are carried forward in this agreement. 

As the ranking member articulated in his opening comments, we 

all know what the problem is. We have U.S. insurers operating in 

the European Union who are being discriminated against today. 

And this was a result of the implementation of Solvency II over 

8 

there, so whether it was in the U.K. or in the E.U., they were beginning to require things of our primary insurers operating there 

and their subsidiaries of their branches. They were requiring us 

to—they were basically enforcing Solvency II upstream into the 

holding company, requiring everything from corporate governance 

rules of the E.U. to reporting requirements to capital requirements 

that could be enforced back onto the U.S. parent, because that was 

the way they were reading Solvency II. 

For the reinsurance community, and again, as the Director pointed out, this was not a new issue, but what was increasingly difficult on the collateral front was that there was a reaction in Europe and they were beginning to require reinsurers to have a physical presence in the E.U. to do business there. Again, a discrimination which was not something they were requiring of their own 

companies. 

So for us, we saw this agreement as timely and a win. It was a 

win for the U.S. insurance industry because no longer can they export Solvency II requirements upstream to the U.S. holding company. That is huge. It is a recognition of our State-based regulatory 

system. It will also eliminate this requirement for reinsurers to 

have a physical presence in the E.U. in order to compete. 

For U.S. insurance consumers, as I just mentioned, we believe 

this continues to be a win, because it is not only going to bring forward the protections that are in U.S. law, but they will also, we 

believe, increase competition, which we think is also good for consumers to having more choices. 

For the U.S. insurance regulatory regime, we see this as a big 

win. It provides really historic recognition and respect for the U.S. 

insurance regulatory system in an international agreement. That 

has never been done before. 

And with respect to group capital, it relies on existing authority 

without demanding any specific capital requirement, and it carefully references the group capital calculation effort already under 

way at the NAIC. 

With respect to collateral, it utilizes existing NAIC rules and 

even builds the language into the agreement. We take those prescriptions from NAIC’s model law, and they are put into this covered agreement. I would say that we are not taking collateral. In 

practical effort, in 2011 when the NAIC began to—they agreed to 

a model law on collateral and it began to move its way through the 

States, and it is approved in 35 States, it reduces effectively collateral from 100 percent which AIA used to support, but under this 

new model that we all agreed to support, it will effectively reduce 

it to around 20 percent on average. 

So this is not going to eviscerate U.S. collateral rules. In fact, it 

builds on what the NAIC is already doing. It just helps us get there 

in a more uniform way, and it has a unique approach for E.U. reinsurers. That is true. But again, it is not eviscerating collateral. And 

all the rules and protections around collateral, the ability to require timely payments, the ability to negotiate additional requirements for collateral around your agreement, these are—and to require prompt payment, all of those things were carried forward into 

this agreement. 

9 

For U.S. negotiators, we haven’t talked about this, but as this 

committee knows well in your efforts, we have all been involved for 

many years now at the international level, at the IAIS, as well as, 

quite frankly, at the FSB on insurance global matters. And for our 

negotiators, they will be in a very strong position empowered by 

this agreement, because now we have the E.U., the second largest 

market, recognizing our regulatory system and our capital standards, and we are going to go into those negotiations much stronger 

off, we believe. So we believe it is a win. 

We acknowledge that the process could be improved. We would 

fully support efforts to review efforts to be more transparent and 

inclusive. We were among the earliest to call for a robust role for 

the NAIC. So we would look forward to that. 

Let me wrap up quickly. We think this is a win. And the only 

concern we have with scrapping this deal is we believe there is no 

guarantee that we would have a timely result that can affect our 

companies today. What is going to take the place of this agreement 

for U.S. companies that are currently being discriminated against 

in Europe if we don’t do this? Thank you, Mr. Chairman. 

[The prepared statement of Ms. Pusey can be found on page 66 

of the appendix.] 

Chairman DUFFY. Thank you. And the Chair now recognizes Mr. 

Chamness for 5 minutes. 

STATEMENT OF CHARLES CHAMNESS, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF MUTUAL 

INSURANCE COMPANIES (NAMIC) 

Mr. CHAMNESS. Good afternoon, Chairman Duffy, Ranking Member Cleaver, and members of the subcommittee. Thank you for the 

opportunity to speak with you today. My name is Chuck Chamness, 

and I am president and CEO of the National Association of Mutual 

Insurance Companies (NAMIC). 

NAMIC is the largest property-casualty insurance trade association in the country, with more than 1,400 member companies representing nearly 40 percent of the insurance market. We appreciate 

the subcommittee’s focus on assessing the impact of the recent 

U.S.-E.U. covered agreement. As the first of its kind, this bilateral 

agreement with the authority to preempt existing State insurance 

law merits careful scrutiny to understand its impact on the U.S. 

domestic insurance industry and policyholders. 

Let me start by saying that NAMIC has long had serious concerns about the use of an international trade agreement and negotiation process to alter or preempt State-based insurance regulation. This final draft covered agreement validates our long-held 

concerns. 

We also believe that the covered agreement does not address the 

problems the FIO and the USTR committed to resolve when the negotiations were started, and the agreement represents a bad deal 

for the U.S. domestic property-casualty insurance industry. 

First, in announcing the negotiations, the FIO and the USTR 

sent a letter to Congress outlining their objectives. Chief among 

them was to obtain permanent treatment of the U.S. insurance regulatory system as equivalent by the E.U. This had become an issue 

10 

due to last year’s implementation of the E.U.’s insurance regulatory 

reform known as Solvency II. 

Under the new regime, an insurer doing business in the E.U. will 

have heightened regulatory requirements in the event the insurer’s 

country of domicile is not deemed equivalent for purposes of insurance regulation. This created a real and present difficulty for the 

relatively small number of U.S. insurers doing business overseas. 

It also provided an opportunity for the E.U. to push for something it had always wanted for reinsurers, its reinsurers, that is: 

the elimination of requirements on foreign reinsurers to post collateral in the U.S. The covered agreement was seen as a vehicle to 

resolve both issues. 

To be clear, NAMIC strongly supports U.S. insurers doing business overseas, and we are fundamentally opposed to the unfair 

trade barriers the E.U. is attempting to erect. It is important to remember that the equivalency determination is an entirely contrived problem of the E.U.’s manufacture. That determination is 

being used simply as a source of pressure on the U.S. to continue 

to alter its regulatory system to the E.U.’s liking. 

Even if we were to stipulate that equivalence was a real problem 

and that the covered agreement and forfeiting reinsurance collateral were necessary to solve it, the agreement fails on its own 

terms. There is no finding anywhere in the covered agreement that 

the U.S. group supervision is adequate, mutual, or equivalent. 

Instead, it merely calls for the E.U. to return to the pre-Solvency 

II status quo of not unfairly punishing U.S.-based insurers. Nor is 

there any guarantee that this status quo will continue at the end 

of the agreement’s 5-year term. Even the Treasury’s own summary 

of the agreement provides that continuation of this accord between 

the U.S. and the E.U. is merely an expectation, not a commitment. 

This lack of commitment, coupled with the establishment of a 

joint committee with the power to amend the agreement, will likely 

lead to a process of endless renegotiation with the E.U. when the 

E.U. decides it would like to see further changes in the U.S. system. 

Of perhaps greatest concern is the requirement for a new group 

capital standard for all U.S.-based insurance groups. If these group 

capital standards are not adopted, the E.U. will not live up to its 

side of the agreement, but if they are adopted, it will impact even 

those companies not doing business in the E.U. This provision is 

at odds with the U.S. legal entity system of regulation. 

The agreement also states that the U.S. group capital standard 

must apply to the complete ‘‘worldwide parent undertaking,’’ and 

include corrective or preventative measures up to and including 

capital measures. It seems to include the power to require increases in capital, capital movement between affiliates, or other 

fungibility mandates. 

Implementation of this kind of group capital standard will shift 

the U.S. from a legal entity regulatory system that protects policyholders towards an E.U.-style group supervision system designed to 

protect investors and creditors. This would not be a win for U.S. 

policyholders. 

The 2015 letter announcing negotiations with the E.U. clearly 

stated that Treasury and the USTR will not enter into a covered 

11 

agreement with the E.U. unless the terms of that agreement are 

beneficial to the United States. NAMIC does not believe this agreement meets that criteria. 

On the whole, it is bad for the vast majority of U.S. insurers 

which do not have operations in Europe and which lose reinsurance 

collateral and get nothing in return other than new group supervision and future regulatory uncertainty. 

We urge Congress to work with the Administration to reject this 

agreement and work on a new solution that meets the needs of the 

U.S. insurance industry and the insurance-buying public. 

Again, thank you for the opportunity to speak here today, and I 

look forward to answering any questions you may have. 

[The prepared statement of Mr. Chamness can be found on page 

40 of the appendix.] 

Chairman DUFFY. The gentleman yields back. 

I want to thank our witnesses for their opening statements. The 

Chair now recognizes himself for 5 minutes for questions. 

Commissioner Nickel, I don’t know if you heard Mr. McRaith testify that you were able to attend and participate in this great deal 

that puts America first. Do you agree with that assessment? 

Mr. NICKEL. There was a small band of brothers of insurance 

commissioners who were put together to be a part of the process, 

that is correct. We were allowed to participate in various forms 

throughout the negotiation, as Mike clearly stated. I suspect we 

will have some different arguments today about the process. Unfortunately, the content of the meetings I can’t discuss, because I am 

bound under strict confidentiality. 

And the most difficult part of— 

Chairman DUFFY. Even now? 

Mr. NICKEL. Yes. 

Chairman DUFFY. You can’t tell Congress? 

Mr. NICKEL. I don’t think I can tell anybody, unless somebody 

gives me the authority to do that. But the most difficult part about 

that process was I was even bound from speaking with my own 

legal counsel, my own chief financial people, so you can imagine— 

put yourself in those shoes, where you are trying to understand 

something about which you can only talk to this small cadre of 

your fellow commissioners. 

Chairman DUFFY. You were given active input in consulting continuously with Mr. McRaith, taking the ideas that you had, the 

concerns that you had into consideration as this deal was negotiated? 

Mr. NICKEL. We were sharing our thoughts and opinions with 

Mr. McRaith and his team. 

Chairman DUFFY. Okay. Were your thoughts and concerns, do 

you think, heard and taken into consideration as this deal was negotiated? 

Mr. NICKEL. I would say, to be fair, Mr. Chairman, that some of 

our input found its way into the agreement. Quite a bit of it probably did not, which is why I am here today, because the membership of the NAIC, all 56 members, came to the conclusion that this 

deal was not a good deal for the U.S. regulatory system, consumers, and insurers. 

12 

Chairman DUFFY. Thank you. I want to move to you, Mr. 

McRaith. I think in your written testimony you said, ‘‘The covered 

agreement does not need to be clarified with further written materials. This would be a fool’s errand. The covered agreement terms 

painstakingly negotiated are abundantly clear, even if not written, 

to resolve every stakeholder’s nuanced fantasies.’’ 

I have had a number of meetings—colorful language, by the way; 

it was good—with those who support and those who disagree with 

this agreement, and almost everyone agrees that there is a lack of 

clarity here. And even those who agree there is a lack of clarity, 

said that they might be concerned about how much time it would 

take us to get clarification, and they don’t want to see the deal be 

torpedoed, but everybody has come together and said that there is 

a need for clarification, and it gives me pause that you are in essence saying, ‘‘No, not at all; it is crystal-clear.’’ 

The lawyers who have represented all the companies that are 

here today have basically given us the same feedback. One commonly cited portion is Article 4A, which lays out capital assessments as a lack of clarity. So what happens if the States create a 

capital standard that the E.U. disagrees with? Is that specified in 

the agreement? 

Mr. MCRAITH. First of all, I appreciate you reading my testimony 

and the colorful prose is mine. And obviously, it is a reflection of 

the fact I don’t have to clear this through the Treasury Department 

any longer. 

Chairman DUFFY. Duly noted. 

Mr. MCRAITH. As someone who practiced law for 15 years—and 

I say this with great respect and affection for the lawyers—it 

doesn’t surprise me that people who have a perspective and angle 

they are pursuing would have lawyers who would support that perspective and angle. 

What the agreement does is, it is absolutely clear on capital and 

group supervision that nothing is expected of the States other than 

what they have already said they will do. 

Chairman DUFFY. I only have a minute. So what happens if the 

States create a capital standard that the E.U. disagrees with? Is 

that clear in there? 

Mr. MCRAITH. The agreement is clear that it can be developed 

however the States want. It does not require anything other than 

what the States have already said they will do. 

Chairman DUFFY. Then what happens if the E.U. disagrees? If 

the E.U. disagrees, how is that resolved? And where is that in the 

agreement? 

Mr. MCRAITH. The agreement establishes a process, like every 

international agreement, questions about interpretation and implementation, if there is a question, we will meet and we will work 

it out and sort it out. It is entirely common practice. 

Chairman DUFFY. All right, I have to be quick. So if it is not 

clear, it will be determined by a body that will be put together. And 

on the committee, who is going to represent the U.S. on the joint 

committee? 

Mr. MCRAITH. Good question. One thing we did not want to do 

was— 

13 

Chairman DUFFY. No, no, I want to—you said, ‘‘We are clear on 

how this thing is going to work.’’ 

Mr. MCRAITH. That is right. 

Chairman DUFFY. Where is the clarity of who is representing the 

U.S.? We don’t know. 

Mr. MCRAITH. The joint committee—it would depend on the 

issue. If it is an issue, for example, concerning a Wisconsin company, my expectation is that the Wisconsin commissioner— 

Chairman DUFFY. But ‘‘depends’’ doesn’t work well. There is no 

specificity in who is on the joint committee. I don’t even know. It 

is not in here. Again, it goes to the point of the first question, you 

are referring me to the joint committee, and when I talk about the 

joint committee, we don’t even know who is going to represent us. 

And again, I just would ask you to—and maybe as we talk about 

this today, that is maybe a point of agreement that, again, I think 

there has been unanimous agreement that if the deal was still to 

go through, clarification would be still really important. 

So my time is long expired. I now recognize the gentleman from 

Missouri, Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Nickel, are you aware that the covered agreement also has 

to go before not only this committee, House Financial Services, but 

also the House Ways and Means Committee, and the Senate Banking Committee? 

Mr. NICKEL. I was not aware of that, but I would look forward 

to the opportunity to be there myself or have someone else present 

in front of those two bodies. 

Mr. CLEAVER. So you would agree, I think, that this is not something that is being rushed through and that we are not giving optimum participation to interested and impacted parties? 

Mr. NICKEL. Absolutely, Congressman Cleaver. I think it is a 

great opportunity. But what we struggle with is the fact that the 

language itself—there doesn’t seem to be any authority to do anything about it. It is a holdover. It has allowed for review by these 

three pertinent committees, but not to be vetoed or changed, et 

cetera. 

Mr. CLEAVER. Right, right. Now, do you know any trade agreement where States are involved? 

Mr. NICKEL. Sir, that is not in my wheelhouse. I don’t spend my 

time on trade. I work to support State insurance regulation. 

Mr. CLEAVER. I think it would be defined as a trade agreement, 

don’t you agree? 

Mr. NICKEL. I wish it was a trade agreement which would have 

a lot more clarity and participation on the behalf of interested parties and all— 

Mr. CLEAVER. I know, but a trade agreement doesn’t mean that— 

if we define a trade agreement only by what we are able to—how 

we are able to influence it, that is kind of a weak definition. The 

point is, my question was going to be—and you answered it—and 

that is that some of your recommendations did, in fact, find their 

way into the agreement, right? 

Mr. NICKEL. That is correct, sir. 

Mr. CLEAVER. And nobody should expect everything they want 

into everything, is that right? 

14 

Mr. NICKEL. That is correct, sir. 

Mr. CLEAVER. Okay, now, thank you. We have over 7,000 insurers in the United States. And all of them are controlled by the 

State in which they are domiciled. And so this is a unique system. 

And you said—I don’t know if you are minimizing it—a small group 

of States were participants. 

Ms. Pusey, can you talk about transparency in this whole process? 

Ms. PUSEY. I think we are probably in the camp that the chairman was referencing, that while we were enthusiastic and supportive of the results of this, I think the process could clearly have 

been improved from what we understand. So how do you oppose 

transparency? I think making all efforts, at the same time recognizing I think that there will be some restraints on that. 

States are not constitutionally recognized to be able to negotiate 

international deals. That is why—that was a lot of the impetus, as 

you also referenced, Congressman, for why we created the Federal 

Insurance Office with this very, very limited authority. It has no 

regulatory authority, but it has limited authority on international 

agreements. 

So while I think we would all embrace more transparency, nothing is ever wrong with a little more clarity, there is a limitation 

I think constitutionally with just how much the States could be involved in an international agreement. And that is where I think we 

all argue that there should be a consultative role, which it sounds 

like there was some of that. 

Mr. CLEAVER. Mr. McRaith, if you would speak to the issue of 

stakeholder involvement? 

Mr. MCRAITH. We asked the State regulators in an unprecedented, unprecedented in any—State regulators are not involved in 

any trade agreement delegation, not involved ever before in any 

international agreement in a negotiation delegation, never before 

we asked the State regulators to create a small task force—we 

didn’t tell them how many, we didn’t tell them whom—those State 

regulators were invited to and did participate in every negotiating 

session. 

We briefed them before and after every negotiating session. We 

shared with them documents before they went to the E.U. We received their input on those documents before they went to the E.U. 

During the negotiating sessions, they were asked for technical insight and input. They provided it at the table, not in the room, at 

the table as a member of the U.S. delegation. 

So we received State regulator impact. We worked with this committee. The other three committees of jurisdiction spoke with them 

before and after every negotiating session multiple times in recent 

months. We worked with all of our stakeholders, particularly those 

engaged in the E.U. and the U.S. Not all of Mr. Chamness’s companies, but those that operate in the E.U. and the U.S. and have a 

stake in the outcome of this agreement. 

And we worked with the entire Executive Branch of the Federal 

Government to get a deal to this committee and the other three 

committees that puts America first. 

Mr. CLEAVER. Thank you. 

15 

Chairman DUFFY. The gentleman’s time has expired. The Chair 

now recognizes the vice chairman of this subcommittee, the gentleman from Florida, Mr. Ross, for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. And I thank the panel for 

being here. My first impression has to do with process. And that 

is what concerns me, because this isn’t a trade agreement. If it was 

a trade agreement, we would have an up-or-down vote. And we 

have the opportunity to review for 90 days, but really what can we 

do as a Congress? This is going to be left up to the Administration, 

to the Treasury Secretary. And so that concerns me from one aspect that will stay over there. 

My other concern is, as I mentioned in my opening statement, 

what benefit do we have for the consumer, for the policyholders? 

And I know that it was said that we will have the benefit of the 

consumer protections that are so good under the State regulation 

system. 

My question to the panel is, what other benefits do the consumers or the policyholders anticipate from the implementation of 

this agreement? And specifically, is there a benefit in the rate-making process that will inure to the benefit of the consumer? In other 

words, will they have a better rate as a result of this? 

And, Commissioner, I will start with you. 

Mr. NICKEL. Thank you, Congressman. Our concern with the 

elimination of collateral for European reinsurers is the fact that we 

now, as U.S. regulators, are going to have to figure out a new 

mechanism by which to assess that risk which has now been transferred to more of us— 

Mr. ROSS. Will you put it in the guarantee fund? Will you require 

more assessment in the guarantee fund? Or how will you balance 

that? And is it going to impact the rate? 

Mr. NICKEL. Correct. Hopefully, nothing will end up in the guarantee fund as a result of this. But what I would say is, as regulators, now that there is no collateral, and there are words on a 

paper now that insurance regulators are going to have to trust 

from E.U. reinsurers as to their financial strength, no more collateral here, $30 billion will be going out the door, that the U.S. insurers are going to have to work now with ceding companies to 

manage that risk, possibly employing other financial strength indicators or capital requirements which will ultimately raise rates 

that your constituents will pay. 

Mr. ROSS. Mr. McRaith, as a former insurance commissioner, 

how do you respond to that? 

Mr. MCRAITH. Two pieces. Let’s be factual about reinsurance collateral relief. The States adopted it as an accreditation standard effective in 2019, meaning every State would have to adopt collateral 

reform. Of the States that have adopted it, 31 companies have received relief. Thirty of those companies are now posting 10 percent 

or 20 percent of the collateral they posted a few years ago. So the 

notion that we are going from 100 to zero is complete fiction. 

Second, that cost savings gets passed on to our primary insurers. 

But third, and more importantly, our flagship companies operating 

in the U.S. and the E.U. will not have to post billions of dollars 

in Europe in compliance costs that otherwise can be used to support affordable, accessible insurance products in the United States. 

16 

Mr. ROSS. Ms. Pusey, the impact of reduced or no collateral at 

all being held, does that increase reinsurance capacity? Or how 

does— 

Ms. PUSEY. We would hope it would be filled up and down the 

chain, yes. We think you are going to have more creativity, more 

products available, and clearly I think one could expect some impact to the rating side. 

If I could, Mr. Ross, I just wanted to come back to a comment 

made about the quality in some of the perception that the consumers are exposed because some of the rules won’t be carried forward. As we understand it, they are quite robust, because they do 

take quite literally from the current NAIC model. So there will be 

a capital surplus requirement on these insurers from Europe, a 

consent to jurisdiction in our courts, a consent to a service of process, 100 percent collateral if they resist timely payments. 

And I have four or five others. The point is, it does carry forward 

a lot of those protections. So we would certainly hope that this 

would not threaten and, to the contrary, would actually enhance 

the U.S. policyholders’ experience with insurance, both in terms of 

product and price. 

Mr. ROSS. And, Mr. Chamness, if I might, because I am running 

out of time here, how do we unscramble the egg? Let’s assume the 

covered agreement goes through. Let’s assume that 2 years from 

now, as we get close to permanency in the 5 years, it is not what 

we thought it would be. How do we get out of it? Or can we get 

out of it? And what impact will that be? 

Mr. CHAMNESS. I think the greater concern is the covered agreement obligates the State regulatory system to take certain steps. 

And if those steps aren’t taken, I think it comes apart on its own. 

So I think there is significant concern over that. 

Also, I would point out—and to your earlier statement, and it 

was a discussion just previously about why were State regulators 

in the room, are they with any other trade agreement, this is a 

very particular type of trade agreement. It has no oversight in 

terms of State regulators, State legislators, or Congress, in terms 

of an up-or-down vote. It is simply a 90-day layover period. And it 

is binding and it preempts State law. 

So I think having State regulators in the room for this type of 

agreement is a very prudent measure. 

Mr. ROSS. Thank you, and I yield back. 

Chairman DUFFY. The gentleman’s time has expired. The Chair 

now recognizes the gentlelady from New York, Ms. Velazquez, for 

5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Ms. Pusey, many observers note that this agreement is vital because of its commercial 

significance and for the level playing conditions it creates. At the 

same time, others note a less tangible, but equally important outcome. This is the first time the E.U. has taken such significant 

steps to recognize the U.S. State-based insurance regulatory framework. 

Can you talk about that? 

Ms. PUSEY. As I said in my testimony, I agree with you. I think 

it is a historic recognition. We have never had an agreement where 

17 

the second-largest market to the U.S. would actually say, we recognize your State-based system. 

And the implications are pretty important. They are not just important today for relieving this pressure that is on our companies 

doing business there, because as we said, it is going to prevent 

them from imposing this upstreaming, if you will, of Solvency II, 

which no one in the U.S., regulators or industry, ever advocated for 

here. 

So it is helpful in that sense. But we also think it is important 

because it is going to, I think, increase the leverage that the U.S. 

has at the international negotiating table. We have talked, I think, 

before this committee about Team USA, which is a collaborative effort between the FIO, the Federal Reserve, and our NAIC, and at 

the international table dealing with issues on ComFrame, which is 

a common framework for internationally active insurance groups. 

And within the ComFrame is a discussion about an insurance capital standard, which is again a global capital standard. 

For the U.S. to be at that table empowered by European recognition of our system, we ought to be pretty forceful at pushing back. 

So we have been good at pushing back. This is further ammunition. 

So to your point, I think it is incredibly valuable, not only historic, 

but valuable. 

Ms. VELAZQUEZ. And can you please comment on specific commercial or supervisory barriers that this agreement will eliminate? 

Ms. PUSEY. Specifically, we have companies that are U.S.-based 

and they are doing business through a subsidiary or branch in the 

European Union, and about a year ago, what we started to feel— 

this is different from the reinsurer issue, which has been ongoing, 

but in the primary space, regulators in Europe were telling our 

companies we don’t recognize your home jurisdiction is equivalent 

to Solvency II in Europe, and therefore we are going to require you 

to hold more capital, consistent with their rules under Solvency II. 

We are going to require you to do an E.U. ORSA, which is a selfassessment that companies have to do, and comply with corporate 

governance rules. 

We even had companies talking about threats to executive compensation being sort of snatched back because the European governance rules are different than the U.S. governance rules. So 

those are some of the specific ways in which we were feeling 

threatened, if not outright discriminated against, under the situation if it is not cured by this. 

Ms. VELAZQUEZ. Thank you. Mr. McRaith, the joint committee established by the agreement is an interesting concept that is used 

quite frequently in trade agreements, and we have alluded to that. 

Do you support NAIC and State regulator involvement in that joint 

committee? And how do you see the joint committee strengthening 

the relationship between the U.S. and Europe on insurance issues? 

Mr. MCRAITH. As mentioned earlier, we did not build out all the 

details of the joint committee in the agreement itself. That would 

have required potentially 40 or 50 more pages to identify what is 

a quorum and what is the membership, all of these kinds of details 

you are familiar with for committee construction. 

Absolutely, a State regulator should be on the joint committee, 

particularly the State regulator whose company might be affected 

18 

or who would be the thought leader on the issue that is being discussed. What the joint committee is intended to do and the purpose—the role it will provide in relation to the broader agreement 

is to allow for collaboration and cooperation, because both the E.U. 

and the U.S. receive benefits from this agreement, important benefits for our consumers and our industry, and both sides want to see 

it work. The joint committee will foster that collaboration, which 

will be so important in the coming years. 

Ms. VELAZQUEZ. Thank you. Ms. Pusey, would you like to comment on that? 

Ms. PUSEY. No, we would be in agreement that we have to have 

robust participation by the NAIC on this joint committee. We think 

it will further enhance the relationship with the European Union. 

We fully expect that they will be consulting with the European Insurance and Occupational Pensions Authority (EIOPA), which is 

their sort of parallel to—in many ways, not exactly, but in many 

ways parallel to our State regulatory system, because you are going 

to want that expertise in the room to deal with those unique issues 

that will come up. 

Ms. VELAZQUEZ. Thank you. I yield back, Mr. Chairman. 

Chairman DUFFY. The gentlelady yields back. The Chair now recognizes Mr. Pearce from New Mexico for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. I appreciate each one of 

the witnesses being here today. 

Mr. Nickel, you just heard Ms. Pusey say that Solvency II is 

going to completely recognize the State-based system. Do you find 

that to be an accurate assessment? 

Mr. NICKEL. I wish that were true, Congressman, but I think it 

is the other way around. I think the Europeans are trying to impose the Solvency II model on the United States, and this is one 

avenue to do that. We are very concerned about that piece, as well 

as the language in the covered agreement itself, which ultimately 

preempts what we have been trying to do with regards to collateral 

reduction, the fine work we have been doing on collateral reduction. 

It takes all the work that we have been doing and then forces 

us to map over an agreement that was put together— 

Mr. PEARCE. Sure, I need to move on, but tell me a little bit more 

deeply about the impact on consumers of the collateral changes 

that you are saying need to be implemented. Tell us more at the 

individual policyholder level what that means? 

Mr. NICKEL. Sure. First and foremost, ultimately the collateral 

that is posted to recognize the risk taken is the ultimate safety net 

for consumers. 

Mr. PEARCE. I understand. But what’s the difference between the 

U.S. and the European markets? 

Mr. NICKEL. The U.S. market requires collateral on behalf of foreign reinsurers, because of the fact that we are not comfortable 

with— 

Mr. PEARCE. At a greater level? 

Mr. NICKEL. Sorry? 

Mr. PEARCE. At a greater level? 

Mr. NICKEL. Yes. 

Mr. PEARCE. Providing greater security? 

19 

Mr. NICKEL. Right, because our U.S. reinsurers— 

Mr. PEARCE. No, that is all I need, just more security. 

Mr. NICKEL. Yes, sir. 

Mr. PEARCE. Mr. Chamness, describe the size of your members 

basically as operations. Are they large, small? You have those 

member associations, and the Europeans want to come and sell in 

our market, and they want to bring their rules over here more or 

less. Is that correct? 

Mr. CHAMNESS. Correct. 

Mr. PEARCE. They don’t want to have to piddle around with all 

the States. That is a little bit beneath us here. We don’t want to 

mess with you State regulators. And so we want a nice—we want 

to clear the playing field out for us, so compare the size of your 

members with the Europeans that want to come here. 

Mr. CHAMNESS. Our members, on a consolidated basis, write 

$230 billion of premium. They range from very large, including 

international, to regionals, one State writers, and small rural mutual that write in rural America. 

Mr. PEARCE. What percent are State and what percent are the 

small guys? 

Mr. CHAMNESS. What percent are the small guys? 

Mr. PEARCE. Roughly, just a lot or a small group or— 

Mr. CHAMNESS. Of the 1,400, probably 600 are small guys— 

Mr. PEARCE. Almost half. Almost half just mom-and-pop operations out there writing insurance, trying to make it work for their 

neighbors. 

Mr. CHAMNESS. Correct. 

Mr. PEARCE. Mr. McRaith described—I guess he was describing 

your positions as theatrical and conjured fiction. Mr. Nickel and 

Mr. Chamness, do you have any response to that? It seemed like 

a fairly— 

Mr. CHAMNESS. Let me just start where you began, and that is, 

I don’t think it is theatrical. When we have read this agreement 

and we know that the primary objective the U.S. had going into the 

negotiations was to obtain equivalence, which has a very specific 

meaning for the European Union, and the word does not appear in 

the document. And mutual recognition, other proxies for that also 

are not in the document. So we have concerns about that and we 

have concerns about the permanence of the treatment that our U.S. 

insurers doing business over there will receive. 

Mr. PEARCE. Yes. So, again, trying to get this whole playing field 

underneath us, Europeans want to come here and use their rules 

to sell to our market. We would like some access to their market 

and we would like them to recognize our system. Is that basically 

the dispute, the totality of the dispute? Is it close enough, Mr. 

Nickel? 

Mr. NICKEL. That is pretty close. 

Mr. PEARCE. Okay, so—and you are concerned because you feel 

like the American consumer might be disadvantaged? We see that 

the operations coming in here are going to be the big multinationals, not going to be mom-and-pops come here. Your momand-pops are not going to go over there and sell insurance, are 

they? 

Mr. NICKEL. No, they are not. 

20 

Mr. PEARCE. They are probably going to stay in their neighborhoods. 

Mr. NICKEL. Correct. 

Mr. PEARCE. So all I do is think in my simplistic way back to my 

first days in owning a small fishing and rental tool company in 

Hobbs, New Mexico, just working in that neighborhood oil fields, 

wanted to buy the best insurance possible, so we went out—and I 

didn’t know anything about insurance, but Lloyd’s of London 

sounded very big, so we bought that insurance from them. 

And we had our first claim. This was a claim, a moderate claim, 

$50,000 to $100,000. Lloyd’s of London told us we are bankrupt, we 

are not going to pay. So we want to let people from over there that 

we can’t have any responsibility, we can’t touch them, they are 

going to come in here with their capital requirements and tell us 

they can’t pay. Mr. McRaith tells me that is a good deal and it is 

theatrical for me to believe differently. Maybe it is. 

I yield back. 

Chairman DUFFY. The gentleman’s time has expired. The Chair 

now recognizes the gentleman from Nevada, Mr. Kihuen, for 5 minutes. 

Mr. KIHUEN. Thank you, Mr. Chairman. 

I just have a couple of very quick questions. Thank you all for 

your presentations this morning. Mr. McRaith, can you please provide some more detailed thoughts on how this covered agreement 

will impact consumer protections, particularly for constituents of 

mine in the State of Nevada? 

Mr. MCRAITH. Sure. First, as I mentioned earlier, the covered 

agreement will improve the affordability and availability of insurance products in the United States. Some of our flagship companies 

that operate in the U.S. and the E.U. would have to post billions 

of dollars potentially in compliance costs that can otherwise be 

used in the U.S. to invest in new products and keep their rates affordable. 

Second, the decrease in reinsurance costs will help those consumers, particularly in areas affected by natural catastrophes, so 

that their primary insurance products are more likely to be affordable. 

Third, the agreement preserves and enhances essential consumer 

protections so if there is a reinsurer from the E.U. who is not paying claims, that reinsurer immediately can be required to post additional collateral to protect the ceding insurers and consumers. 

And then finally, I would say it is—this is not a binary choice 

between industry and consumers. This agreement has the benefit 

of benefiting industry and those benefits will also benefit consumers. So in its totality, this is an agreement that serves all of 

the U.S. industry interests and U.S. consumer interests. 

Mr. KIHUEN. Thank you. And just one more question. I know 

there have been some complaints that this could be a backdoor for 

the E.U. to impose their standards on U.S. insurers. We also need 

to recognize that we are living in an increasingly interconnected 

world where the barriers for U.S. companies to enter foreign markets are becoming smaller and smaller. Can you speak on how you 

think the U.S. can adequately achieve balance between lowering 

the barriers for insurers to operate internationally while at the 

21 

same time making sure that one country can’t single-handedly 

change regulatory standard globally? 

Mr. MCRAITH. First of all, what the agreement does is endorse, 

embrace, enshrine our U.S. system of supervision at the State level 

for the first time in history in an international agreement. The 

agreement does not call for the States to do anything other than 

what they are doing already. 

Second, the E.U., as a consolidated market, is actually larger 

than the U.S. market. So we need to preserve opportunities for our 

companies to operate there, to compete there. 

And then, third, what is even more important is that our companies need certainty about how the E.U. and the U.S. are going to 

work together so they can compete in those massive developing 

economies like China, India, Brazil, and Indonesia, they can use 

that capital they have accumulated and invest in organic growth 

in developing economies around the world. 

Mr. KIHUEN. Thank you, Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentleman from Florida, Mr. Posey, for 5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. Mr. Chamness, outside 

the reinsurance collateral issues, I have heard concerns that the 

U.S., under this covered agreement, will be required to make significant changes to our State system of regulatory supervision, 

which as you know is based on legal entity supervision. 

Article 4H of the agreement requires the U.S. to create a group 

capital requirement which from my understanding differs from the 

current State regulation in two ways. One, it requires that the 

States adopt a group capital assessment, which we don’t have 

today. It also requires a lead State regulator to have the authority 

to act, including by requiring additional capital, if it sees an issue 

as a result of the group capital assessment. 

How do you view the capital requirements in article 4H? Could 

the corrective preventive measures included in the agreement require, for instance, increases in capital, capital movement between 

affiliates, or other fungibility mandates that go against the United 

States-based system of insurance solvency? 

Mr. CHAMNESS. Thank you for the question. I think you have 

summed up the elements of article H that concern us very well. 

The Europeans have a different way of regulating. We focus on 

legal entities and we focus on solvency for those legal entities. They 

focus on group capital and group supervision. And it is different. 

And to the extent that this agreement moves us further in the 

direction of European standards, where we would be forced to 

change the way we regulate here in the U.S. and to really take 

away the focus that we have in the U.S., which was one of our 

great benefits, is we focus on the policyholder. In Europe, they 

have much greater emphasis on creditors, on investors, and preserving the insurance company. 

In the U.S., we let insurance companies fail where they deserve 

to fail, and first we try to rehabilitate them. Then, they may fail. 

And we also have a guarantee fund system here, which is different 

than Europe. They don’t have a similar structure to deal with insolvencies and to pay claims after insolvencies, claims that are actually paid for by the remaining companies in the market. 

22 

So it is a much different system. And as we look at the authority 

to preempt State law contained in this agreement, the permanent 

committee moving forward that will further fine-tune the agreement and perhaps commit us to future other changes to our structure, we are very concerned that we will be implementing more European regulatory law into the U.S. system. 

Mr. POSEY. Yes, I am afraid any time we talk about giving up 

sovereignty, a mini-U.N. where we carry the burden and everybody 

votes against us every opportunity they have. But a follow-up, last 

Congress, we passed legislation into law to ensure that the regulator of a savings and loan holding company cannot raid the assets 

of an insurance company subsidy in order to prop up a failing subsidy affiliated with the overall holding company. 

This walling off of insurance, if you will, is to me one of the 

strengths of the way that we regulate our system, and it is because 

it places the emphasis on the policyholders. In other words, we are 

protecting the policyholders, first, over failing institutions, and second, which you just mentioned is different than the way they do 

it in Europe. I have always considered this to be one of the benefits 

to the legal entity regulation in the United States, and I wonder 

if we move toward the group supervision provisions, if it will alter 

our system? I clearly believe it will. But my question to you is, do 

you think the priority will still be protecting the policyholders? 

Mr. CHAMNESS. Again, I think if we adopt more European-style 

regulation, it won’t. And I think your example of the law to basically wall off the insurance legal entity from the insured depository 

institution that may be part of an insurance group is a very apt 

comparison to the type of challenges we are concerned about under 

this agreement if more European regulation comes here. 

Mr. POSEY. Mr. Chairman, I see my time is about out. I yield 

back. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentlelady from Ohio, Mrs. Beatty, for 5 minutes. 

Mrs. BEATTY. Thank you so much, Mr. Chairman, and Ranking 

Member Cleaver. And let me also thank all of the witnesses who 

are here today. 

My first question goes to you, Mr. Chamness. In your testimony, 

you stated that the U.S. Trade Representative and the Federal Insurance Office conducted the covered agreement negotiating meetings in a closed, confidential manner and failed in their commitment to meaningfully include State regulators in the negotiating 

process. I think you went on to say that State regulators were mere 

observers in the negotiating process. 

I then heard Mr. McRaith in his oral testimony, I think, mentioning that Ranking Member Cleaver outlined a whole litany of inclusive things when he laid out the steps that the FIO and the 

USTR. took to include State regulators and to be transparent in 

the process. 

With all of that said, I won’t go through all of the things that 

have already been outlined, but I guess, after hearing that compelling argument, it appears that the USTR and the Federal Insurance folks went far beyond the call in engaging the stakeholders, 

my question to you is, what about that process do you find lacked 

transparency or didn’t adequately involve the State regulators? 

23 

Mr. CHAMNESS. Thank you for the question. We have two participants here at the table, so perhaps my characterization of the way 

State regulators were included in the negotiations could be amplified by either participant. 

But I think we just heard Leigh Ann say that the process could 

have been improved. And it was a situation where having an agreement that has the authority to preempt State insurance law, automatic authority with no oversight or up-or-down vote either by legislators at the State or Federal level, there was very much a meaningful role there for State insurance regulators to play. 

Whether they did effectively in these negotiations, and whether 

Commissioner Nickel can talk about his participation in any greater detail than he did earlier, I guess I would ask him or ask former 

Director McRaith to describe the participation further. 

Mrs. BEATTY. I will give you a few seconds, too. I just thought— 

I understand what you are saying, it could have been better. But 

I guess to be helpful to me, and you are an expert here, what would 

be the, ‘‘could be better?’’ 

Mr. CHAMNESS. I think that having State regulators negotiate 

the agreement in conference with FIO, working side-by-side in a 

transparent way, and frankly including more elected leaders like 

yourselves in the process, at least to review and approve the agreement that has been reached before it goes into effect and preempts 

State insurance law, bypassing the legislative process. 

Mrs. BEATTY. And when you say ‘‘yourselves,’’ I’m assuming that 

means Congress, as I heard in this testimony that we already have 

in place where you can consult with Congress either in person or 

by telephone, before negotiations begin, before and after each session, and before the negotiations were finalized, is that not enough? 

Is there more that we should be doing? Because it said in person 

or in telephone with us. 

Mr. CHAMNESS. I think the process was the process and the 

agreement is the agreement. And as we talk about and have presented our comments on the agreement, it was consultation with 

the U.S. Treasury and the USTR informing Congress about their 

objectives here, and I read from their objectives. One was to obtain 

treatment of the U.S. insurance regulatory system by the E.U. as 

‘‘equivalent’’ to allow for a level playing field for U.S. insurers and 

reinsurers operating in the E.U. 

Regardless of the process, though I do care about the process and 

I think the question is an excellent one, perhaps for future use as 

we consider how to do a different covered agreement, but on the 

terms of the agreement that have been released now and that we 

are talking about today, we don’t believe it met the objective that 

the U.S. itself, the Treasury and the USTR, set forth in terms of 

our U.S. objective in the agreement. 

Mrs. BEATTY. Okay. 

Mr. NICKEL. Congresswoman, may I just chime in for 2 seconds? 

I appreciate it. Thank you. I would just add, in terms of revising 

the process, insurance matters are very technical in nature. They 

touch each company in different ways. Having an avenue for participation by those key stakeholders, as well as our consumer representatives who would have input there, would have been very 

helpful along the way. 

24 

Having the ability for me to consult with my own staff; for the 

insurance regulators themselves to bring in the rest of their group 

to get consensus might have driven outcomes, which may not have 

put us at this table today in opposition. Thank you. 

Mrs. BEATTY. Thank you. I yield back. 

Chairman DUFFY. The gentlelady yields back. The Chair now recognizes the former Chair of this subcommittee, who is the current 

Chair of the Financial Institutions Subcommittee, the gentleman 

from Missouri, Mr. Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman, and you are doing 

a great job today. Thank you very much for the opportunity to be 

here. 

Also, thank you for the hearing. I think it is vitally important 

that we have this hearing today. I think part of our duty as I have 

said many times is not just legislative, it is oversight, to provide 

oversight and direction. In this situation, we are providing oversight over the FIO Director and his activities. And I think it is important that we help him, that we guide him, and provide him the 

leverage that we need to do to help him do his job. And I hope that 

he comments on that. I think that is what our objective was for the 

last 2 years: to be able to give him the tools and leverage to get 

his job done. 

But before I do that, I will make a couple of comments. I think 

today we have an example of the problem we have in the insurance 

industry. We have two groups representing two groups of insurance 

companies that disagree. Imagine that. 

And then we have a regulator who had 5 years to come up with 

a solution for this problem and did nothing. And now, we are nipping at the heels of the agreement that we have, and we have 

dumped this whole problem in the Director’s lap. And he has to 

deal with a dysfunctional group of industry folks and a regulator 

who doesn’t want to get along and do anything, and he has to come 

up with an agreement to make this all work. I take my hat off to 

you, Mr. McRaith. You have done a great job. Is it a perfect agreement? Probably not. Could it be tweaked? Probably. 

But I think if the industry is serious about getting something 

done, I will tell you from my perspective they better get on the 

same page, because I am up to here with this dysfunctional infighting with the industry and the regulators and nobody getting anything done. You are going to go backwards as an industry if you 

don’t get together. That is my comment. 

Now, Mr. McRaith, I have had a couple of companies in my district and my State who have been directly impacted by the request 

from Ireland, Belgium, and Germany to have a physical presence 

over there. So this is a big deal to me. I think that you have done 

a good job in negotiating, trying to thread the needle. 

One of the comments that has been made that concerns me is regarding ‘‘equivalency.’’ We have heard that term thrown around a 

couple of times, both from Mr. Nickel and Mr. Chamness. Would 

you please address what you believe is the solution to this or the 

addressing of this issue and the like? 

Mr. MCRAITH. Yes. Thank you, Mr. Chairman. First of all, we 

sent that letter in November 2015 at the commencement of the negotiations using the word ‘‘equivalence.’’ As we did that, we learned 

25 

what I alluded to earlier, which is that every time you talk to a 

lawyer or a so-called Solvency II expert, you get a different explanation about what ‘‘equivalence’’ actually means. So we were focused on the outcome. 

We changed our focus. Let’s have in the agreement clarity about 

how U.S. companies will be treated when they operate in the E.U. 

We don’t want equivalence. And that is because an equivalent 

country like Switzerland has a global group capital requirement, 

global group reporting and governance, exactly what we don’t want. 

So paragraph 4H, as discussed by Mr. Posey, and I regret that 

he is not here to hear this, because he misunderstood it, what that 

paragraph says is the United States will supervise its companies 

however it deems appropriate. The States have said for 2 years 

now we are going to develop a group capital calculation, and what 

that paragraph 4H says is, as the States do that over the next 5 

years, U.S. companies operating in the E.U. will not have to be 

subject to Solvency II compliance burdens, including potentially billions of dollars in additional capital. 

So the notion of equivalence we surpassed because our companies 

are being treated entirely fairly with—and being able to supervise 

as the States deem appropriate without global group capital requirements, global group governance and reporting. 

Mr. LUETKEMEYER. Thank you. One more question for you, quickly. One of the things that we did in a hearing last fall was we had 

a hearing similar to this and discussing this issue, and we made 

the comment during that, that if the Europeans wanted to penalize 

and punish our companies, there could be retribution against them 

in this country if they are going to play that game. Does this agreement affect us in any way so that we can’t—it ties our hands so 

that we can’t be able to have retribution or are penalized in any 

way these companies that try to come here and push their stuff on 

us? 

Mr. MCRAITH. Mr. Chairman, first of all, I want to thank you for 

the letter that you provided November 29th, I think of 2016, and 

frankly, although our exchanges were not always pleasant, you 

were extremely forceful about the importance of representing U.S. 

interests. 

What this agreement does is allow the U.S. companies to be supervised in the U.S. as the U.S. determines appropriate. There are 

no penalties for that. If, however, U.S. companies in the E.U. are 

not supervised according to this agreement, then the reinsurance 

reforms that will benefit E.U. reinsurers can be retracted. And 

then vice versa. If the U.S. doesn’t perform on the reinsurance provisions, which, by the way, the States have adopted as an accreditation standard, then our companies in the E.U. can be treated adversely. 

Chairman DUFFY. The gentleman’s time has expired. 

Mr. LUETKEMEYER. Thank you. 

Chairman DUFFY. The Chair now recognizes the gentleman from 

Massachusetts, Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. And I want to thank the 

witnesses for their help. 

I am very suspect of these international negotiation agreements 

that exclude Congress and exclude the State regulators in this case 

26 

to a certain degree. I have a healthy distrust of what the U.S. 

Trade Representative has been doing in the past. 

I was an iron worker for about 20 years, and I used to work at 

the General Motors plant in Framingham, Massachusetts. Then 

they negotiated NAFTA, and a bunch of plants, including the one 

I had worked at, closed down and moved over the border. 

So I have real distrust about allowing industry to negotiate—the 

people with the direct financial interest to negotiate these agreements outside of the purview of Congress and outside the representation of the people who elected us. I have a real mistrust about 

that. 

We negotiated a trade agreement with South Korea. It included 

automobiles. I go to South Korea. I spent 3 or 4 days there. Major, 

major country. Big superhighways. I saw two U.S. cars, two. One 

was the one I was riding in from the embassy. The other one was 

my security detail right behind me. That was it. 

I went to Japan. We have a big trade agreement with Japan. I 

couldn’t find an American car. If you go outside this building, you 

can’t spit without hitting a Japanese or a South Korean car. 

So when we sit down in negotiations and want equivalency, that 

was the goal of our agreement, our insurance agreement, was to 

get equivalency for our system. And then I pick up the agreement 

and the word ‘‘equivalency’’ does not appear. It does not appear. We 

negotiated this agreement. It does not mention equivalency that 

U.S. standards will be recognized and acknowledged and given full 

force and effect in the E.U. 

So as far as I am concerned, based on reading the agreement, 

and I know there is a lot of goodwill out there and let’s all play 

nice, it doesn’t give us what we were looking for. It doesn’t give us 

equivalency in the E.U. It gives us the hope that maybe in the future we could get that, but we don’t get it. 

And what’s more, it allows for the States’ laws to be preempted. 

And that—I think one of the great things about our State-driven 

insurance regime, our system, is that it is very close to the people. 

And it requires support at the State level. And that is where I 

think the public’s influence is the strongest and the big industry 

people’s influence is the weakest. It is a good match. 

And I just have great, great trepidation about this whole—I am 

a new member of this committee. I have only been here for 2 

weeks. But I just have great misgivings about how we did this. I 

would like Congress to be part of this process. I really would. I 

hate this. You go negotiate the agreement, and when we find out 

at the end what it has in it, and you surprise us, and then we have 

an up-or-down vote. Or in this case, it is just a 90-day layover period; we don’t even get a vote. Congress negotiates war and peace, 

life and death, every major issue in our society. But when it comes 

to trade agreements or international insurance agreements, we are 

excluded from the process. 

So I would like a process that allows the people—I have 727,514 

people that I represent in Boston, Quincy, Brockton, and a bunch 

of towns in Massachusetts. I would like my people—my people 

through me—to have some input into this process. And when I feel 

confident that their interests have been acknowledged and been included, then I will vote for this, then I will support it. I don’t like 

27 

the process. There is a lack of transparency here. And we have to 

change the system, the way this all works. 

I appreciate all the really smart people in the insurance industry, but having the people with the most direct financial interest, 

their own financial interest at the table negotiating this while the 

people who are going to be affected by it are outside the process 

is not right. It is just not right. And this system was created a long 

time before I got here, but I think we ought to have a bipartisan 

agreement that the people we represent should be part of this process at some point. 

So with that, Mr. Chairman, I yield back the balance of my time. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the Vice Chair of the Financial Institutions Subcommittee, the gentleman from Pennsylvania, Mr. Rothfus, for 5 

minutes. 

Mr. ROTHFUS. Thanks, Mr. Chairman. I want to follow up on Mr. 

Lynch here, because this is one of the issues I was struggling with 

last night. I read my Constitution. Article I, Section 8 provides that 

Congress shall have the power to regulate commerce with foreign 

nations and among the several States and with Indian tribes. Does 

this covered agreement regulate commerce with foreign nations, 

Mr. Nickel? 

Mr. NICKEL. I believe so. 

Mr. ROTHFUS. Mr. Chamness? 

Mr. CHAMNESS. Yes. 

Mr. ROTHFUS. Ms. Pusey? 

Ms. PUSEY. Yes. 

Mr. ROTHFUS. Mr. McRaith? 

Mr. MCRAITH. This agreement does not regulate anything. It is 

an agreement between countries about how they will separately 

regulate and deal with the industries operating within their territory. 

Mr. ROTHFUS. You don’t think this regulates commerce? Is it a 

trade— 

Mr. MCRAITH. This is a regulatory agreement that articulates 

how the U.S. will regulate U.S. industry and the E.U. will regulate 

E.U. industry. 

Mr. ROTHFUS. Is it a trade agreement? 

Mr. MCRAITH. It is not a trade agreement. 

Mr. ROTHFUS. I thought I saw—some of you were mentioning 

this being a trade agreement. 

Mr. MCRAITH. I have heard that. I have never said that. In fact, 

I have said the opposite. It is a covered agreement. If it were a 

trade agreement, it would be called a trade agreement. A covered 

agreement refers to prudential insurance and reinsurance matters. 

Mr. ROTHFUS. Dodd-Frank requires consultation with Congress 

on covered agreements. Does consultation equate the power to regulate? Again, this is a threshold issue that I was kind of struggling 

with last night as I look at this covered agreement, trying to figure 

out, where does Congress gets its say? 

Because I think this does regulate commerce with foreign nations, which begs the question, where is Congress’ power to regulate? Us having a 90-day consultation period, us not having an opportunity to have an up-or-down vote on this, compare this with 

28 

what we did with trade promotion authority. We have Dodd-Frank. 

We said the Secretary of the Treasury and the United States Trade 

Representative are authorized jointly to negotiate and enter covered agreements on behalf of the United States. 

Looking at TPA, and it says that the President and the USTR 

can enter an agreement. But then it is up to Congress to ratify 

that. And that is where we get to exercise our constitutional power 

to regulate commerce. 

We have already seen parts of Dodd-Frank, or at least one part 

of Dodd-Frank, that has been challenged constitutionally, and it is 

currently held up in court. That is with the structure of the CFPB. 

And I guess I am just struggling with that. 

Where do the people that we represent, the total notion of selfrule and self-government—we have been talking about this for 

years on our side of the aisle, the opportunity for us to be the voice 

of the people. 

The Congress is where government of the people, by the people, 

for the people happens. And here we have a covered agreement 

that will regulate commerce among the nations, and we are not 

getting a say. We just get to consult. 

Mr. McRaith, one of the many things that stands out to me about 

this covered agreement is the date it was sealed, 1 week before the 

inauguration of a new President. As you know, President Trump 

made negotiating better deals a hallmark of his campaign. He has 

argued that the U.S. has not made deals with other countries that 

provide the most benefit possible for American workers and firms. 

Since the covered agreement was reached before the new President could come into office and leave his mark on these negotiations, I am curious about the extent to which negotiators consulted 

with the transition team before the election. Were there such any 

consultations with the transition team? 

Mr. MCRAITH. These agreements were conducted confidentially 

with the input of the entire delegation after extensive consultations— 

Mr. ROTHFUS. Okay, so the question was, was there consultation 

with the transition team, yes or no? 

Mr. MCRAITH. The transition team was not part of our confidential U.S. delegation. 

Mr. ROTHFUS. Okay. Why was the covered agreement reached on 

January 13th? Any significance to that date? 

Mr. MCRAITH. First of all, our industry, U.S. reinsurers were losing opportunities every day. Our primary insurers were confronting 

potentially billions of dollars in compliance costs on an urgent 

basis. 

Mr. ROTHFUS. Was January 20th at all a figure? Was January 

20th a consideration? 

Mr. MCRAITH. No. So we provided to you on January 13th—because it needed to be provided on a day that both Chambers of 

Congress were in session, so I suppose theoretically we could have 

provided it the morning of the 20th, but I think our perspective 

was to get it to you as soon as we finished it, which was that day. 

Mr. ROTHFUS. Last question. I just want to go back to the earlier 

issue. Have any of you ever considered the constitutionality, or 

29 

have your groups considered the constitutionality, of this covered 

agreement? Yes or no? 

Mr. CHAMNESS. No. 

Mr. ROTHFUS. Has that been studied? 

Mr. CHAMNESS. Not by us. 

Mr. ROTHFUS. Mr. McRaith? 

Mr. MCRAITH. I am not a constitutional lawyer, Congressman, 

but the question is, can we reach an agreement that serves the 

best interests of the United States? And that is what we did. 

Mr. ROTHFUS. I yield back. Thank you. 

Chairman DUFFY. The gentleman’s time has expired. The Chair 

now recognizes the gentleman from California, Mr. Sherman, for 5 

minutes. 

Mr. SHERMAN. In Washington, there are lies, there are fibs, and 

there is misuse of the word ‘‘consultation.’’ All too often, consultation means you go to a few leaders in Congress, you say here is 

what we are doing, but we don’t care what you think, we will pretend to care what you think, we won’t tell anybody else in Congress 

what you are doing, and we will call that a ‘‘consultation.’’ And that 

somehow makes us a democracy, though I haven’t figured out how. 

Speaking of consultation, to what degree were the 50 U.S. insurance regulators at the State level involved in this process, Mr. 

McRaith? 

Mr. MCRAITH. Sir, Congressman, as I mentioned before your arrival, in a completely unprecedented manner, we established a 

mechanism to include the State regulators as part of the negotiating delegation. So we asked— 

Mr. SHERMAN. Is this agreement— 

Mr. MCRAITH. —them to form a small team, which they did— 

Mr. SHERMAN. —binding on— 

Mr. MCRAITH. They were part of every step of the negotiations. 

Mr. SHERMAN. Thank you. I hear you. I am going on to another 

question. Is this agreement binding on them? And on the—do they 

have to comply with it in how they regulate insurance companies 

around this country? 

Mr. MCRAITH. In fact, the provisions regarding group supervision 

are already what the States do or what they have committed to do 

and it gives them 5 years to do it. In terms of reinsurance— 

Mr. SHERMAN. They have committed to do it, but they might 

change their mind and decide they don’t want to do it. But this 

binds them to it. 

Mr. MCRAITH. No, the agreement provides them latitude to supervise as they have done historically and have planned to do publicly. With respect to reinsurance, there is the potential for preemption, but they have adopted that reform as an accreditation standard, meaning every State, including California and Washington, 

has to adopt it as a matter of law or regulation within the next 2 

or 3 years. 

Mr. SHERMAN. And what if they choose not to? What if the legislature of California says, we hate everything you did? What happens? 

Mr. MCRAITH. Then that State, California, would lose its accreditation status with the NAIC, which would punish California industry and consumers, but that is an NAIC issue. 

30 

Mr. NICKEL. Congressman, may I—I’m sorry. 

Mr. SHERMAN. Yes, go ahead. 

Mr. NICKEL. May I just jump in a little bit? A couple of things. 

One, yes, we do have an accreditation process. And we will be finished with that accreditation process, where we do have a reinsurance law on the books. But our reinsurance law does not go to zero, 

unless there is an extraordinarily well-capitalized company. 

We will be preempted and we will be asked to change our law 

to the law that will already be in effect in most States to recognize 

the fact that we either need to change it or to be preempted. 

Mr. SHERMAN. And as Mr. McRaith pointed out, if you choose not 

to do that, you and your consumers and your companies will be 

punished through an act of the U.S. Federal Government? Do I 

have that right? 

Mr. MCRAITH. That would be an act of the States. 

Mr. NICKEL. There would be preemption, yes. 

Mr. SHERMAN. Excuse me. Go ahead. 

Mr. NICKEL. That would be the preemption piece, that—if a State 

decides not to comply. 

Mr. SHERMAN. If a State chooses not to comply, what—Mr. 

McRaith was saying that results in the consumers and/or companies in that State suffering. How would they suffer? 

Mr. NICKEL. In my opinion, we all suffer by having the—if we 

focus on the reinsurance collateral piece a bit, for just one more 

second, that we lose the reinsurance collateral provisions of our 

model. There are 216 reinsurers in the European Union. Only six 

of them have gone through our process to reach financial security 

review, financial stability review. The other ones haven’t. They are 

at 100 percent collateral. 

When this goes into effect, the other two hundred and whatever 

go—216 go from 100 to zero. But right now, they are operating 

fully comfortable at 100 percent collateral. So just so we are clear, 

this isn’t just a couple of companies wanting to do business in the 

United States. We will have a large number of European reinsurers 

now operating in the U.S. that didn’t either want to follow or chose 

not to follow our financial review. 

Mr. SHERMAN. Ms. Pusey, do you regard this as a threat to our 

State-based system of regulation? I know that you have generally 

taken the view that this is a win-win. So why is it a win for the 

concept of State regulation? 

Ms. PUSEY. Because it really enshrines it. It preserves it. So we 

took a contrary view, because we actually see that this does not 

threaten the State-based system. It actually preserves it. I don’t 

know whether we wore the Europeans out over time or what has 

happened. They certainly have had an interest in exporting Solvency II to other jurisdictions. That is very true. And it is also very 

true that the U.S., from industry perspective and regulator perspective and Federal Government perspective, has said no to that 

and have resisted it. 

So for whatever combination of reasons, late this fall, there was 

a wearing down, if you will, in the deal—from a product—if you 

look at the results, our view is that this is respecting the U.S. system. It is going to let us regulate ourselves under our group supervisory rules and our group capital rules. 

31 

Mr. SHERMAN. I yield back. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentleman from California, Mr. Royce, for 5 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. I know in my committees, 

there is a practical limitation. I usually only have three or four witnesses. But in this particular case, if we are going to have a full 

conversation about this agreement, we do need to think about all 

the negotiating parties and all the parties affected that are not at 

the table, the USTR here, the life insurers, the reinsurers, the 

major brokers. 

And the practical limitations don’t allow us really to make the 

hearing that broad. But I would make that point. And if I could 

summarize where I think we are today, in terms of these tracks, 

on the one hand, the States are going down a path where reinsurance collateral requirements are already being lowered, albeit at a 

snail’s pace, and in return the E.U. has not agreed to any relief for 

U.S. insurers or reinsurers. It is possible we get nothing then for 

something. So that is one path. 

And meanwhile, Congress gives Treasury and the USTR the 

power to negotiate a covered agreement, a power, by the way, 

which was debated in this very committee and unanimously supported by both sides of the aisle on a bipartisan basis. Treasury 

and the USTR then negotiated an agreement that effectively agrees 

to what the States have already agreed to do and lower the reinsurance collateral. 

In return, we open up the entire E.U. reinsurance market to U.S. 

reinsurers without discrimination and we save direct writers billions of dollars in European compliance costs, which as we have 

heard today can be passed along to consumers. 

So I would just ask Ms. Pusey, am I missing something here in 

the way this appears to me? 

Ms. PUSEY. No, sir, that is our read, as well. 

Mr. ROYCE. And I would ask Mr. McRaith, without this agreement in place, we have seen regulators in the U.K. and in the 

Netherlands, Austria, Germany, and Poland place U.S. companies 

at a severe disadvantage. If we scrap this agreement, as some are 

suggesting today, where does that leave us? And what are State 

regulators authorized to do to adequately address these issues? Is 

the E.U. looking to sign MOUs with 50 States? 

Mr. MCRAITH. U.S. reinsurers were being denied opportunities 9, 

10 months ago in the E.U. We resolved that issue through the 

agreement and opened the entire European market to U.S. reinsurers. U.S. primary companies were being asked to comply with 

extraordinary regulatory requirements in the E.U. that could be increasingly burdensome, but for this agreement. 

I can’t speak to what the Europeans would do in the event this 

agreement were to fail in the United States. But I know that our 

industry and American insurance jobs have a lot—our industry has 

a lot to lose and American insurance jobs are at stake. 

Mr. ROYCE. Well, that was my read of the situation, as well, Mr. 

McRaith. And I will yield back, Mr. Chairman. Thank you very 

much. 

32 

Chairman DUFFY. Thank you. The gentleman yields back. The 

Chair now recognizes the gentleman from Washington, whom I 

would just note has a strong interest in protecting our State-based 

model and has introduced legislation on a similar issue. The gentleman from Washington, Mr. Heck, is recognized for 5 minutes. 

Mr. HECK. Thank you, Mr. Chairman. Thanks very much for the 

opportunity even to participate today. 

Mr. McRaith, you and I kind of went back and forth on this quite 

a bit last year. And I took the position of a protector of State-based 

regulation. You assured me as a former State regulator that that 

would be the case verbally, and then you wrote—or your office 

wrote me a letter that said the law did not require that Treasury 

and the USTR include State insurance regulators in the negotiations. 

Nevertheless, in recognition of the role of States in U.S. insurance oversight, Treasury and the USTR are including and engaging 

with State regulators in a direct and meaningful manner throughout the ongoing negotiations. 

And I take it from your earlier somewhat impassioned remarks 

that you believe that you complied with both the letter and the 

spirit of that assurance to me. Yes or no? 

Mr. MCRAITH. The agreement is a better agreement because 

State regulators were at the table— 

Mr. HECK. Did you comply with the spirit— 

Mr. MCRAITH. —in the room. They absolutely contributed. 

Mr. HECK. Did you comply with the letter and spirit of what you 

wrote? 

Mr. MCRAITH. Absolutely. 

Mr. HECK. Thank you, sir. Mr. Nickel, you said in your opening 

statement that State regulators were assured that we would have 

direct and meaningful participation, but the small group of us included were merely observers: only one allowed in the room subject 

to strict confidentiality with no ability to consult our staff and fellow regulators. Is it fair to characterize your view that the spirit 

and letter of what was assured to me and which I just quoted was 

not adhered to? 

Mr. NICKEL. I think that is a fair characterization, Congressman. 

Mr. HECK. And, Mr. Nickel, is it accurate that you are the elected or chosen voice on behalf of the State regulators throughout our 

country, and you are speaking on their behalf? 

Mr. NICKEL. I am speaking on their behalf today. 

Mr. HECK. So in addition to that irreconcilable points of view, I 

would like to quite literally, Mr. Chairman, seek permission to 

enter into the record the voice of yet another entity, that of the 

Intergovernmental Policy Advisory Committee on Trade (IGPAC), a 

letter from the Chair of IGPAC. May I, sir? 

Chairman DUFFY. Without objection, it is so ordered. 

Mr. HECK. So IGPAC, as you may all know, is the trade advisory 

committee appointed by the USTR, and it provides trade policy advice on matters that have a significant relationship to the affairs 

of State and local governments. I think this is significant, because 

it is a voice actually beyond insurance regulators, per se, but on behalf, as it were, the corporate interest of State Government. 

33 

And I want to, if I may, quote briefly from the letter that I am 

in receipt of from the Chair, Mr. Robert Hamilton, ‘‘After it was reported that the U.S. and the E.U. were negotiating a covered agreement, on multiple occasions, the IGPAC requested that the USTR 

and the Treasury Department closely consult with the relevant 

stakeholders and provide regular briefings to the IGPAC throughout the covered agreement negotiations in light of the potential for 

this agreement to impact State sovereignty, discriminatory actions 

by E.U. member countries, and potential national treatment violations by the E.U. Unfortunately, the Treasury Department and the 

USTR failed to honor this promise and provided only one superficial briefing in December 2015 before the first round of negotiations and failed to provide any briefings during the ongoing negotiations.’’ 

Mr. Chairman, I would submit not just this letter, but fact that 

the preponderance of evidence is, in fact, on the side of those who 

believe that the process did not meaningfully involve the State regulators and those who had that interest at stake. But look, I don’t 

seek to protect State-based regulation for its own sake in and of 

itself. Good process, bad process, evidence suggests bad process. 

Good product, bad product, arguable. I do so because, in fact, what 

we have observed is an undercutting of the State-based regulation. 

And that to me is harmful in two ways. Number one, it is violative in spirit, if not technically, of the underlying policy framework 

of insurance regulation in this country, namely the McCarran-Ferguson Act. And let me remind everybody that the basic covenant 

of McCarran-Ferguson is that if you will to submit to State-based 

regulation, you are exempt from antitrust. 

I strongly suspect—I am not even going to ask, Ms. Pusey—that 

you do not want to have our antitrust exemption pulled from you. 

But if McCarran-Ferguson is no longer the law of this land, directly 

or indirectly, that is exactly the debate we ought to have. 

And secondly, I protect State-based regulation because it works. 

Because we provide good safety and soundness regulation, prudential regulation, and consumer regulation. And if you are asking 

who is better to do this, the Feds or the States, I just want to remind you that AIG was regulated by the Feds. How did that work 

out for us? 

State-based regulation works. And we should not go down the 

path of that which undercuts it. With that, I yield back the balance 

of my time, and I thank you, Mr. Chairman. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentleman from New Jersey, Mr. MacArthur, for 5 

minutes. 

Mr. MACARTHUR. Thank you. Before I get to my questions, I 

would actually like to ask Ms. Pusey if you would answer that 

question. Would you like to see your members be subject to antitrust regulation and see McCarran-Ferguson overturned? 

Ms. PUSEY. Thank you for that opportunity. We are very strong 

supporters of the State-based regulatory system. We have no interest in supporting and have arduously opposed any efforts to undermine State-based regulation. And it is in that spirit that we can 

support this agreement, because we think it actually recognizes it 

and props it up and gives it global recognition. 

34 

Mr. MACARTHUR. But you would not want to see your position 

relative to antitrust changed? 

Ms. PUSEY. No, sir. 

Mr. MACARTHUR. Your members wouldn’t want that? 

Ms. PUSEY. Congress delegated that authority to the States from 

McCarran. Yes, sir, we appreciate that recognition on the antitrust. 

Mr. MACARTHUR. Mr. Nickel, could you—and you could go on for 

a while, but I need you to be brief— 

Mr. NICKEL. I will try. 

Mr. MACARTHUR. —because I don’t want to have to cut you off, 

and I have a few other questions. Could you very briefly remind 

us of the benefits of State-based regulation to consumers? 

Mr. NICKEL. Sure. We are the boots on the ground representing 

consumers in front of insurance companies. When there are issues, 

we work in their States. We know them by name. They call us. We 

take care of consumers. And then we ultimately take care of and 

monitor the financial solvency of the companies domiciled in our 

State. 

Mr. MACARTHUR. When an insurer fails, is it fair to say that the 

home State is generally the one that is impacted the most? 

Mr. NICKEL. Generally speaking, yes. But sometimes companies 

have a broad footprint throughout many States. 

Mr. MACARTHUR. I understand. But generally, it is local people, 

another reason I think for State-based regulation. I want to explore 

this idea of preemption. Mr. McRaith, I thought your answer before 

was really very interesting. And I am paraphrasing, so correct me 

if I didn’t get this right, but you said that this doesn’t regulate industry participants; it controls how the regulators oversee those 

participants or impacts. Is that basically what you said? 

Mr. MCRAITH. It is an agreement of mutual respect, where the 

E.U. says, ‘‘U.S., you do it how you want to do it.’’ And we say to 

the E.U., ‘‘You can do it how you want to do it.’’ 

Mr. MACARTHUR. But what happens if an insurer, an individual, 

not a group, but an individual writer of insurance in a State has 

a different opinion of what it needs to hold in capital and the regulator in that State agrees with the capital requirement? What happens if that is different from what the FIO believes should be held 

or what the E.U. regulators believe should be held? Whose opinion 

carries the day on how much capital needs to be held? 

Mr. MCRAITH. The only party authority relative—that can determine whether a U.S. insurance company has sufficient capital is a 

State regulator. And this agreement endorses exactly that. 

Mr. MACARTHUR. Is there any circumstance where the covered 

agreement could preempt a State’s determination of capital requirements? 

Mr. MCRAITH. No. The group supervision practices, including 

the— 

Mr. MACARTHUR. So what is the 5 years that a State regulator 

has to comply—what does that apply to? 

Mr. MCRAITH. So for over 2 years, the States have been developing a group capital calculation. The agreement gives them an additional 5 years to do that for the insurers that are operating—only 

the insurers operating both in the U.S. and the E.U. So not every 

company, not every State, not every company in any State. 

35 

Mr. MACARTHUR. But those are the very ones I am asking you 

about. So if there is a difference of opinion with one of those 

groups, whose determination prevails? 

Mr. MCRAITH. It is the State regulator who will decide how companies are regulated. If hypothetically, to the Chair’s question earlier, if the E.U. has a different view of that, and the adequacy of 

that, that is discussed. Supervisors, by the way—as you well 

know—deal with these issues every day. These are nuts and bolts 

regulatory questions dealt with— 

Mr. MACARTHUR. I have to cut you off, because I have only 30 

seconds. And I just want to make a point. Where you stand on this 

issue I suspect depends on what your business interests are. It is 

sort of, ‘‘whose ox is being gored.’’ 

So I understand why the insurance commissioners see it as an 

erosion of their control. I understand why the mutual companies— 

and I was once a member of NAMIC and was once a member of 

AIA—so I understand both—and AIA’s members, unless it is 

changed, are companies like Munich Re, Swiss Re, Allianz. These 

are global insurers. And so it is no surprise to me that your members welcomed this sort of a change in the oversight, because your 

members are very different than NAMIC’s members. Is that not 

true? 

Ms. PUSEY. Hartford, Travelers. 

Mr. MACARTHUR. I know that there are those. But two-thirds of 

your board members are global insurers. 

Ms. PUSEY. No, with all due respect— 

Mr. MACARTHUR. I know, because I checked. I checked this 

morning. So it is not meant to be a criticism. It is just the reality 

that your perspective is very open to this shifting to a globalization 

of insurance control. And I don’t think that comports at all well 

with McCarran-Ferguson and the State-based system that has 

served us so well. 

My time has expired. I yield back. 

Chairman DUFFY. The gentleman yields back. The Chair now 

recognizes the gentleman from Illinois, the vice chairman of the 

Capital Markets Subcommittee, Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. And thank you all so 

much for being here today. I appreciate your work. 

Director McRaith, it’s good to see you. We worked together in Illinois and also out here, as well. And I appreciate all of you being 

here today. 

I am new to the Housing and Insurance Subcommittee. I am 

grateful to be working with Chairman Duffy and everybody else. I 

think this is so important. And especially for Illinois. We have a 

lot of challenges in Illinois. One of the things we actually do well 

is insurance. And I have some wonderful entities there and I am 

grateful for them, but I am also grateful for the work that they provide to my constituents. So these are important issues that we are 

discussing. 

Illinois, as I said, has a number of insurance companies that are 

vital to ensuring customers. Consumers and businesses are able to 

manage their risk in all of their endeavors. Today’s topic regarding 

the recently negotiated covered agreement between the U.S. and 

the E.U. is an important one, and I am glad Chairman Duffy 

36 

worked expeditiously to convene this hearing in the 90-day review 

period provided to Congress. 

Mr. McRaith, I wonder if I could address my first question to 

you: Does the covered agreement require States to change collateral rules? And if so, this is only perspective, correct? Is that true? 

And would existing reinsurance contracts be affected? 

Mr. MCRAITH. The agreement would potentially require States to 

do what they have already committed to doing with respect to reinsurance collateral reform. Period. And I’m sorry. Your second question? 

Mr. HULTGREN. Would existing reinsurance contracts be affected? 

Mr. MCRAITH. Oh, I’m sorry, yes. 

Mr. HULTGREN. But let me finish. The text of the covered agreement says amended reinsurance contracts could be impacted by the 

agreement. Can you clarify this definition and explain what effect 

an amendment to a reinsurance contract would have on reinsurers’ 

obligation to post collateral? 

Mr. MCRAITH. Yes, exactly. The agreement is clear that it only 

applies prospectively. Questions come up about what does the word 

‘‘amendment’’ mean? First of all, an amendment to a contract requires two parties to agree, so if the ceding insurer doesn’t agree, 

there is not an amendment to the contract. 

However, if there were an amendment, in this context, that 

would have to be a material change to the underlying reinsurance 

contract. It could not be just some clerical or administrative 

change. It would have to be a meaningful material change to the 

underlying contract. 

Mr. HULTGREN. Okay. Staying with you, Mr. McRaith, I wonder 

if you could walk me through the process of how this covered agreement was negotiated. As someone who served as a former insurance commissioner of Illinois, your perspective certainly is important to me and valuable to me. What role did the State of Illinois 

have in negotiating the covered agreement? And if they did not 

have a seat at the table, who was speaking on their behalf, and 

what mechanism for input did they have? 

Mr. MCRAITH. We began the negotiations actually in early 2016 

after announcing the start in late 2015. We asked the States to 

identify the membership of a small task force that would participate directly in the negotiation. As a former State regulator, and 

as the Director of the Federal Insurance Office, I have said repeatedly, written repeatedly, and strongly believe that McCarran-Ferguson serves our consumers and our industry, our country very 

well. This agreement is intended to further support that. 

So we did get the perspective of Illinois, but the States opted— 

they chose who the membership of their task force would be. Illinois was then represented by Commissioner Ted Nickel and his colleagues in the effort. 

Mr. HULTGREN. Commissioner Nickel, going to you, what role do 

you feel like you and other State insurance regulators had in the 

covered agreement process? Since the covered agreement process is 

new, can you tell us how it compared with other international discussions where State insurance regulators are involved? 

Mr. NICKEL. Sure. I will try to be brief. Thank you for the question. I have just met your new Director, Director Hammer. She is 

37 

great. I think you will be well-served. The statement was made 

that we selected a group to represent the NAIC. We negotiated a 

group to be—that not everybody that we wanted to have at the 

table with us was allowed. We did negotiate a group. It was a 

small group. 

There were seven of us at the table. We would have loved to 

share updates with interested parties and—there were seven of us. 

There are 13,000 insurance regulators working every day in the 

United States that we represent. There were seven of us allowed 

at the table. Actually, there were seven of us allowed, normally just 

one at the table. 

The process itself was difficult. And it would have been better 

served if we would have been able to have more ability to share 

opinions with our members and bring back more thought to the 

process. 

Mr. HULTGREN. I wish that could have happened, as well. My 

time has expired. We do have a few more questions, so we may follow up with you in writing to see if we could get answers to them. 

With that, I yield back, Mr. Chairman. Thank you. 

Chairman DUFFY. The gentleman yields back. I want to thank 

our panel for their testimony today. And maybe just to note, it is 

pretty clear we have a wide array of views on this covered agreement. And it is good for us to hear everyone’s different positions. 

And I think it was Mr. MacArthur who mentioned your business 

model might dictate your support or lack thereof. And it is good for 

us to hear from you all. 

I also think it is important to note that there may be a need for 

us as we move forward to look at clarification. I know Mr. McRaith 

might disagree with that, but I know others have agreed with the 

clarification point. There has been concern about the process that 

was used. And there is concern about preemption. And I think you 

heard unanimous concern for the congressional involvement, 

should there be any future deals that are put together. Just a couple of my takeaways. 

But I think all of us are engaged in this issue, and I look forward 

to working with not just the panel, but also those who participated, 

who have shown up to this hearing. So again, thank you all. 

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

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

materials to the Chair for inclusion in the record. 

And without objection, this hearing is now adjourned. 

[Whereupon, at 12:04 p.m., the hearing was adjourned.] 

(39) 

A P P E N D I X 

February 16, 2017 

40 


27201.001

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Statement 

of the 

National Association of Mutual Insurance Companies 

to the 

United States 

House Financial Services Subcommittee 

On Housing and Insurance 

Hearing on 

Assessing the U.S.-ED Covered Agreement 

February 16, 2017 
41 


27201.002

Comments of the National Association of Mutual Insurance Companies 

Assessing the U.S.-EU Covered Agreement 

February 16,2017 

Page 2 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to 

provide comments to the House Financial Services Subcommittee on Housing and 

Insurance on the recently completed U.S.- European Union (EU) covered agreement 

dealing with insurance regulation. We appreciate the subcommittee's focus on an 

important matter that has the potential to greatly impact the domestic U.S. 

property/casualty insurance industry. 

NAMIC is the largest property/casualty insurance trade association in the country, with 

more than 1 ,400 member companies representing 39 percent of the total market. 

NAMIC supports regional and local mutual insurance companies on main streets across 

America and many of the country's largest national insurers. NAMIC member 

companies serve more than 170 million policyholders and write more than $230 billion 

in annual premiums. Our members account for 54 percent of homeowners, 43 percent 

of automobile, and 32 percent of the business insurance markets. 

Introduction 

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank) created a new office in the Department of Treasury called the Federal Insurance 

Office (FlO). Although given no explicit regulatory authority, the new office was 

empowered, in conjunction with the United States Trade Representative (USTR), to 

negotiate and enter into international "covered agreements" on insurance regarding 

prudential measures. These agreements are between the U.S. and one or more foreign 

governments or regulatory entities and must "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." 

The "covered agreement" concept was wholly created by and defined in the Dodd-Frank 

Act. It is an invented term for insurance and not a standard type of contract, covenant, 

understanding or rule, subject to existing and recognized practices and requirements. 

The scope of a covered agreement is not well-defined in statute, but the Dodd-Frank 

Act provided the power to preempt state insurance laws that are inconsistent with the 

agreement and result in less favorable treatment of a non-U.S. insurer domiciled in a 

foreign jurisdiction that is subject to a covered agreement. Exactly how these 

agreements are to be negotiated, entered into, and applied are subject to interpretation 

of the high-level guidelines in Dodd-Frank. Many questions remain concerning these 

agreements, the policy decisions at the outset and throughout negotiations, as well as 

the application of these agreements, and the rights of parties to participate in and/or 

challenge them. 

NAMIC has long had serious concerns about the use of an international trade 

negotiation process to alter or preempt the state-based system of insurance regulation. 

We have argued that the USTR and the FlO should exercise such authority only if they 

determine that extreme circumstances demand it, and then only after full and 
42 


27201.003

Comments of the National Association of Mutual Insurance Companies Page 3 

Assessing the U.S.-EU Covered Agreement 

February 16, 2017 

transparent due process, including consultation with state legislative and regulatory 

authorities and public exposure of the policy objectives of the negotiations. 

Our analysis of the recently finalized draft agreement validates our long-held concerns. 

Despite claims otherwise, we believe that the covered agreement does not address the 

problems the FlO and USTR committed to resolve when the negotiations were started. 

To be clear, those companies that are being threatened by increased regulatory 

burdens by EU regulators need relief and we are in favor of providing them with that 

relief. However, the agreement is ambiguous and unclear and does not provide 

sufficient protections and benefits for the U.S. insurance market and consumers. As 

drafted the agreement represents a bad deal for the U.S. domestic property/casualty 

insurance industry. The U.S. can- and must- do better. 

Currently, the agreement sits in Congress for a 90-day layover period, which is intended 

to provide lawmakers the opportunity to review and provide comment on the agreement. 

However, the agreement does not require congressional approval. At the end of the 90 

days, Treasury and USTR may bring it into effect. This 90-day period began to run 

seven days before the new President was inaugurated, before the new Treasury 

Secretary or U.S. Trade Representative was confirmed, and after the key U.S. 

negotiators had resigned their positions. That said, Congress should urge the Trump 

Administration to go back to the drawing board and secure a better deal. 

Covered Agreement Negotiations 

On November 20, 2015, the FlO and USTR officially sent a letter to Congress 

announcing the initiation of negotiations for a covered agreement between the U.S. and 

the EU, notification required by Dodd-Frank. Over the course of a year, representatives 

from the U.S. and the EU met five times in person for negotiations. These meetings 

were followed by a series of telephone negotiations at the end of President Obama's 

second term. Finally, in the last week of the Administration, on Friday, January 13, 

2017, USTR and the FlO released the final negotiated covered agreement language. 

The impetus for the initiation of negotiations was the pending 2016 implementation of 

the EU's insurance regulatory reform known as Solvency II. Under the new regime, an 

insurer doing business in the EU is subjected to heightened regulatory and capital 

requirements in the event that the insurer's country of domicile is not deemed 

"equivalent" for purposes of insurance regulation. U.S.-based insurers had begun 

receiving threatening letters from EU regulators suggesting that because the U.S. had 

not been deemed equivalent, they stood to be penalized which would make them less 

competitive. While this created a real and present difficulty for the small number of 

insurers doing business overseas, the need for "equivalency" was completely 

manufactured by the EU in their enactment of Solvency II. 

It is likely that the EU leveraged its Solvency II equivalency determination to pressure 

the U.S. to negotiate more favorable treatment for its reinsurers. Foreign-based 

reinsurers have long chafed at the requirement in the states that they must post 

collateral in the U.S. for ceding insurers to get credit for purchasing their reinsurance. 

This problem was addressed by the NAIC in their 2011 revised model Credit for 
43 


27201.004

Comments of the National Association of Mutual Insurance Companies Page 4 

Assessing the U.S.-EU Covered Agreement 

February 16, 2017 

Reinsurance Act. fn that model act they provided for a staggered collateral system 

based on the credit rating of foreign reinsurers from qualified jurisdictions. Despite the 

passage of that model in more than 35 states, the goal of the EU has always been to 

quickly and uniformly eliminate the requirements for reinsurance collateral in the U.S. 

for the benefit of EU reinsurers. 

Whatever the case, many of the U.S. companies that do business internationally urged 

the FlO and USTR to move quickly to negotiate a covered agreement with the primary 

goal to settle- promptly and finally- the question of U.S. insurance regulatory 

equivalence with the EU under Solvency II. With the two sides' goals in mind, the 2015 

letter announcing the initiation of negotiations laid out the prudential measures the 

covered agreement would seek to address: 

1. Obtain treatment of the U.S. insurance regulatory system by the EU as 

"equivalent" to allow for a level playing field for U.S. insurers and reinsurers 

operating in the EU; 

2. Obtain recognition by the EU of the integrated state and federal insurance 

regulatory and oversight system in the United States, including with respect to 

group supervision; 

3. Facilitate the exchange of confidential regulatory information between lead 

supervisors across national borders; 

4. Afford nationally uniform treatment of EU-based reinsurers operating in the 

United States, including with respect to collateral requirements; 

5. Obtain permanent equivalent treatment for the solvency regime in the U.S. and 

applicable to insurance and reinsurance undertakings. 1 

As we will discuss in more detail below, even by the standards laid out by USTR and 

the FlO the negotiated covered agreement is a failure for the United States. There is no 

finding that U.S. group supervision is permanently adequate, mutual, or equivalent. The 

EU has only agreed to return to pre-Solvency II status quo when they were not unfairly 

punishing U.S.-based insurers for the U.S. state laws. 

The Covered Agreement 

The covered agreement allows for a period of five years to phase-in provisions which 

address three prudential areas- Reinsurance Collateral, Group Supervision, and 

Confidential Exchange of Information. The agreement also sets up a permanent "joint 

committee" to oversee implementation and to consider amendments in the future. 

NAMIC believes that on the whole there are more negative provisions than added value 

especially for those insurance companies that only write in the U.S. For companies 

writing internationally who need to rely on this agreement the most, its ambiguity raises 

significant questions about what they can count on from the EU insurance supervisors, 

if U.S. regulators will meet the obligations they were not involved in negotiating, and 

whether they will be disadvantaged by one of the many exceptions to the agreement. 

1 November 20, 2015 Jetter from the U.S. Treasury Department and the Office of the United States Trade 

Representative to Congressional Committee leadership announcing initiation of covered agreement negotiations 

with the European Union. 
44 


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Comments of the National Association of Mutual Insurance Companies Page 5 

Assessing the U.S.-EU Covered Agreement 

February 16, 2017 

These companies and those who represent them are "hopeful" things witt work out and 

they want to believe that everyone witt abide by the intent of the agreement. NAMIC is 

not so optimistic. We believe we can only rely on the language in the four corners of the 

document, and that language is not encouraging. 

Reinsurance Collateral 

The section of the covered agreement dealing with reinsurance collateral states that no 

EU reinsurer, meeting all other requirements to do business in the U.S., can be required 

to post collateral in the U.S. If the states do not adopt taws reflecting this zero-collateral 

requirement within five years, the covered agreement allows the federal government to 

pre-empt those state laws which remain in conflict. 

Of course, this change will negatively impact insurers, both small and large in the U.S. 

as these companies are no longer guaranteed the collateral that EU reinsurers must 

hold in the U.S. to assure prompt payment of reinsurance claims. This collateral is 

critical to assure the collectability of U.S. judgments. Reinsurance payments help 

insurers timely pay the money owed to policyholders in the event of natural 

catastrophes or other large loss events. The elimination of required collateral 

particularly disadvantages smaller insurers which are more reliant on reinsurance. And 

though the agreement provides no prohibition on negotiating for collateral in reinsurance 

contracts, the small insurance companies will not have the same negotiating power as 

larger companies. 

With the elimination of reinsurance collateral, state regulators have already proposed to 

eliminate credit to the companies for the purchase of reinsurance. Instead they would 

replace the lost reinsurance collateral by creating new obligations for the ceding 

companies in an enhanced capital requirement. This would fundamentally alter the way 

all U.S. insurance companies deal with capital requirements. 

We do not dispute some potential benefit from the resolution of the reinsurance issues 

between the U.S. and the EU. However even those benefits are exaggerated and in 

many cases impacted by exceptions and ambiguous language. 

First, there is a claim that the elimination of collateral requirements could result in lower 

reinsurance premiums. Premiums are affected by market cycles and currently the soft 

market driven by a flood of new capital is causing prices to go down particularly in the 

property catastrophe reinsurance market. In addition, the enactment of the NAIC's 

model taw in many states and the collateral reduction that resulted may have already 

contributed to lower prices. Second, there are provisions which increase the 

requirements applicable to the EU reinsurers for ensuring payment of claims owed and 

enforcing judgments in the U.S. These are positive provisions, but would be 

unnecessary if not for the covered agreement removing the collateral requirement. 

Finally, the EU supervisors can no longer require U.S. groups doing business in EU 

member states to have a "local presence" in the country unless they have a similar 

requirement for their domestic (re)insurers. While U.S. (re)insurers are considering this 

an important concession, this is only an advantage for U.S. groups doing business in 

the EU if the EU supervisor does not currently have, nor decides to add, a similar 

requirement for the domestic EU companies. In addition, it is important to note that if the 
45 


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Comments of the National Association of Mutual Insurance Companies Page 6 

Assessing the U.S.-EU Covered Agreement 

February 16. 2017 

agreement fails or terminates, it would be much easier to undo forbearance of these 

local presence demands of of EU supervisors than to repeal new state laws/regulations 

eliminating reinsurance collateral. This is not an equal trade for U.S. insurers. 

The EU is unlikely to be the last jurisdiction to push for zero-collateral requirements as 

Bermuda has already asked whether the U.S. will give them the benefit of the same 

deal. This could be the beginning of zero collateral for all non-U.S. reinsurers. This 

would ignore the work state regulators/legislatures have done in the last several years 

in adopting changes to the NAIC's Credit for Reinsurance Model Act and Regulation. 

The state policymakers enacting these laws have considered the issues, listened to 

interested parties, and developed solutions that balance the interests of foreign 

reinsurers, the U.S. primary insurers that are their customers, and the policyholders of 

U.S. companies who expect their claims to be paid. The process has been methodical 

and transparent and the issues fairly and openly debated, unlike anything about the 

covered agreement. Thirty-five states have already acted to enact this new NAIC model 

and those remaining states need to enact the revised model before 2019 to retain their 

NAIC accreditation. 

Group Supervision 

The covered agreement also addresses group supervision and group capital 

requirements. This issue was added to the covered agreement by U.S. Treasury with 

the idea that the U.S. would gain acceptance of the U.S. existing system of group 

supervision in exchange for giving up reinsurance collateral. Observers and interested 

parties were expecting simple recognition of the supervision provided in the model 

holding company act adopted and enforced in all states. 

Instead, the agreement provides that the EU will allow U.S. insurance regulators to 

provide group supervision for their own domestic insurance groups that do business 

internationally. But, the EU doesn't recognize this right for parts of U.S. holding 

companies based in the EU or any of the affiliates of that EU-based group anywhere in 

the world. The EU also does not recognize this right for any U.S. holding company with 

a depository institution or that has been designated a Systemically Important Financial 

Institution (SIFI) or Global Systemically Important Insurer (G-SII). Nor does the 

agreement recognize this right if at any time they feel the insolvency of one of these 

U.S. companies could harm EU policyholders or threaten the EU economy. Finally, 

even if the U.S. provides supervision the EU maintains the right to ask for "information" 

for purposes of prudential group supervision that is "deemed necessary" by the EU 

supervisor to protect against serious harm to policyholders or financial stability. This 

sounds as though EU regulators can apply Solvency II reporting requirements at their 

discretion. 

In concept, this group supervision provision is what U.S.-based insurers doing business 

in the EU need to avoid punitive regulatory requirements from EU supervisors. 

However, once the U.S. meets all its obligations under the agreement, and all the 

exceptions to the "recognition" of group supervision are considered, there is no 

language requiring that the EU will treat the U.S. as a "mutually recognized" or 

"equivalent" jurisdiction under Solvency II. Under this agreement, the U.S. will be taking 

actions at the state level that will be very difficult to reverse, without any guarantee that 
46 


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Comments of the National Association of Mutual Insurance Companies Page 7 

Assessing the U.S.-EU Covered Agreement 

February 16, 2017 

at the end of five years the EU would continue to recognize the U.S. insurance 

regulatory structure as permanently mutual or equivalent. Allowing U.S.-based insurers 

to continue operating in the EU without regulatory penalty is nothing more than a return 

to the pre-Solvency II status quo. Even by the standards laid out by USTR and the FlO, 

this provision is a failure. 

Of perhaps the greatest concern for all U.S.-based insurance groups (internationally 

active or not) is that the covered agreement seems to require U.S. states to enact 

provisions that are at odds with the U.S. legal entity system of regulation, specifically a 

group capital requirement. If these group capital standards are not adopted, the EU will 

not live up to its side of the agreement, but if they are adopted, it will impact even those 

companies not doing business in the EU. 

Article 4(h) requires the U.S. to impose a group capital assessment that sounds similar 

to an NAIC project underway to develop a group capital calculation that has specifically 

been designed as a tool for supervision, not a capital requirement. However, the 

covered agreement anticipates a calculation that is more than an assessment tool. It 

must apply to the complete "worldwide parent undertaking" and must include 

corrective/preventive measures, up to and including capital measures. It appears 

that the intention is to include the power to require increases in capital, capital 

movement between affiliates, or other fungibility mandates. Implementation of this kind 

of group capital standard will shift the U.S. away from a legal entity regulatory system 

and toward an EU-style group supervision system. Capital additions and new 

requirements will affect the affordability and availability of new insurance 

products and are not in the best interests of consumers. 

As noted these capital requirements would apply to the "world-wide undertaking parent" 

or the entire conglomerate that holds an insurance company- even entities completely 

removed from the insurance and financial sectors. This scope of capital is not even 

required under Solvency II, is broader than the scope of the current IAIS group capital 

standard, and conflicts with common sense. Insurance regulators should not be 

assessing the risk of manufacturing affiliates, telecommunication companies, and hotels 

held by a conglomerate just because they also hold an insurance company. This is, 

rightfully, outside their authority. 

It is not clear that it was the intention of the parties to apply the covered agreement 

preemption authority to the group supervision provisions. However, the plain language 

of the agreement (Article 9) suggests it is not limited to the reinsurance article of the 

agreement. The Dodd-Frank Act states that the Director may only apply preemption to a 

state law that: 

"(A) results in less favorable treatment of a non-United States insurer domiciled 

in a foreign jurisdiction that is subject to a covered agreement than a United 

States insurer domiciled, licensed, or otherwise admitted in that State; and (B) is 

inconsistent with a covered agreement." (31 USGS §313(f)(1 )(A) and (B)) 

Some interpretations provide that this language limits application only to the reinsurance 

requirements. But there is concern that the EU may expect the groupwide supervision 
47 


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Comments of the National Association of Mutual Insurance Companies Page 8 

Assessing the U.S.-EU Covered Agreement 

February 16, 2017 

language in the 2014 NAIC Holding Company Model Act to be adopted in every state. If 

that is the expectation, it could lead to a nullification of this agreement down the roadafter the U.S. has already enacted difficult to reverse changes to state insurance law 

and regulation. 

Process Concerns 

NAMIC has serious concerns both about how the current covered agreement was 

negotiated, and how the process will work going forward. Negotiations with the EU 

were conducted in closed, confidential meetings, between the EU Commission, USTR, 

and the FlO. State insurance regulators were relegated to a minimal role, though these 

negotiations directly and significantly impact state laws and regulations. In the letter 

announcing negotiations both USTR and the FlO stated that "State insurance regulators 

will have a meaningful role during the covered agreement negotiating process."2 Both 

offices clearly failed in this commitment - only a small group of state regulators were 

included in the process as mere observers and were subject to strict confidentiality with 

no ability to consult fellow regulators or the broader community of stakeholders. 

Going forward, we are concerned about the creation of a standing "joint committee" 

composed of unnamed EU and U.S. representatives to oversee both implementation 

and the amendment of the current agreement. There may be some benefit from having 

a formal committee to help address disputes among the parties regarding the 

agreement. However, the joint committee creation and required meetings once or twice 

a year add to the perception that this is intended to be an on-going evaluative process 

with the EU and U.S. federal authorities telling state regulators whether they are doing 

their jobs well enough to meet federal and EU standards. The amendment process built 

into the agreement also conceivably allows federal and EU authorities to alter the terms 

in such a way that could also lead to further preemption of state law. And these 

amendments could be made without entering into a "new" covered agreement, 

bypassing the transparency provisions like the 90-day lay-over period put in place in 

Dodd-Frank. The prospect of endless renegotiation with the EU with little in the way of 

transparency should be worrisome to all. 

Conclusion 

The letter announcing the commencement of negotiations with the EU, clearly stated 

that "Treasury and USTR will not enter into a covered agreement with the EU unless the 

terms of that agreement are beneficial to the United States."3 NAMIC does not believe 

that the offices met this criterion. Overall, the deal is a bad one for the vast majority of 

U.S. insurers which do not have operations in Europe and which get nothing from the 

agreement other than increased costs and new regulatory uncertainty. It is also a bad 

deal for consumers in America who ultimately pay for all of the additional costs 

associated with EU-style regulation being imported to the United States. 

The covered agreement is an invented solution to an invented problem - the question of 

European regulators deeming our regulatory system equivalent. Again, to be clear, 

2 Ibid. 

3 Ibid. 
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Comments of the National Association of Mutual Insurance Companies Page 9 

Assessing the U.S.-EU Covered Agreement 

February 16. 2017 

those companies that are being threatened by increase regulatory burdens by EU 

regulators need relief and the U.S. should find a way to provide them with that relief. 

However, it is our view that the U.S. can and should explore other ways to address the 

unjustifiable trade barriers which the EU seems intent on throwing in the way of our 

domestic insurers attempting to do business overseas. That might include recourse 

through existing enforcement tools available in trade agreements, or it might involve 

negotiating a mutual recognition provision in a future trade agreement. NAMIC believes 

that the U.S. ought to be able to move the EU to take non-equivalent determinations off 

the table so that our insurance and reinsurance markets can continue to function 

without unfair barriers to trade. 

In the end, Congress should urge the Trump Administration to go back to the drawing 

board and secure a better deal. A new solution is needed that meets the needs of the 

insurance-buying public, the insurance industry, and state regulators. NAMIC 

appreciates the opportunity to testify and looks forward to working with the committee 

going forward. 
49 


27201.010

EMBARGOED FOR DELIVERY 

Written Testimony of Michael T. McRaith 

House Committee on Financial Services 

Subcommittee on Housing and Insurance 

"Assessing the U.S. - EU Covered Agreement" 

February 16, 2017 

Chairman Duffy, Ranking Member Cleaver, members of the Committee, thank you for 

inviting me to testify about "Assessing the U.S. - EU Covered Agreement." 

I previously served as the Illinois Director of Insurance from 2005- 2011, and as the 

Director of the Federal Insurance Office (FlO) at the U.S. Department of the Treasury 

from 2011 until January 20, 2017. While serving as the FlO Director, among other 

things, I coordinated and developed Federal policy on prudential aspects of international 

insurance matters and served as Treasury's lead negotiator for the "Bilateral Agreement 

Between the European Union and the United States of America on Prudential Measures 

Regarding Insurance and Reinsurance" (Covered Agreement). 

Including today, I have been privileged to testify before Committees of the United States 

Congress on 20 occasions. I first testified on June 20, 2006, on behalf of the National 

Association of Insurance Commissioners (NAIC) in the U.S. Senate Committee on the 

Judiciary, and offered testimony in support of the limited anti-trust exemption in the 

McCarran-Ferguson Act. As in that first hearing, and in every hearing since, I reiterate 

today my respect and support for the U.S. integrated system of insurance oversight 

wherein the states remain the primary regulators of the business of insurance. 

Most states have diverse insurance markets in which multi-national insurers of great 

size, scale and complexity compete against insurers that operate only in one state, or in 

only one region of one state. As the Director of Insurance in Illinois, I witnessed 

firsthand the importance of these insurers regardless of size or geographic reachto consumers, to local and state economies, to employees, and to our national interests. 

Insurance agents, brokers and companies are an essential feature of every American 

community. 

Competitive insurance markets offer critical benefits to working families and small 

businesses. Products and services offered by America's insurers allow families to 

protect and accumulate property, to transfer wealth between generations, and to ensure 

a financially secure retirement. Insurance is a necessary component of America's 

promise of economic fairness and opportunity. 

Indeed, Treasury and USTR's Covered Agreement negotiating authority recognizes the 

global interests of the U.S. insurance sector and the implications of those interests for 

the American insurance industry and consumers. For these reasons, among others, 

Treasury and the United States Trade Representative (USTR) jointly negotiated and 

agreed upon the Covered Agreement with the European Union (EU). 

1 
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Covered Agreement- Background 

The prudential insurance matters resolved by the Covered Agreement are neither new 

nor surprising. Reform of the U.S. state reinsurance laws was first debated by state 

regulators in 1999, if not earlier, well more than a decade before state regulators 

unanimously adopted modernized model laws and regulations in November 2011. 

However, despite energetic efforts by the state regulators through the NAIC, only 32 

states have adopted some version of reinsurance reforms. Both the content 

and the implementation of that reform varies across those 32 states. For this 

reason, among others, state regulators, through the NAIC, opted in 2016 to promote 

consistency in solvency oversight by adopting reinsurance reforms as an NAIC 

accreditation standard, effective January 1, 2019. By virtue of this NAIC decision, 

all states will adopt a law or regulation substantially similar to the NAIC model 

law and regulation by January 1, 2019, or confront the loss of NAIC accredited status. 

While the NAIC spent years sorting through alternative approaches to reforms of statebased credit for reinsurance laws. the European Union (EU) spent years developing its 

Solvency II insurance supervisory regime. Solvency II was first anticipated more than 10 

years before its implementation on January 1, 2016. The EU and its member states 

should be congratulated on the successful technical development and implementation 

of Solvency II, an EU-wide system of insurance oversight that reflects a high level of 

professional and political accomplishment. 

Almost from the earliest days of the development of Solvency II, U.S. insurance sector 

participants, including state regulators, were aware that Solvency II could require the 

EU to evaluate whether non-EU insurers and reinsurers operating in the EU market 

were domiciled in "equivalent" jurisdictions. An "equivalent" jurisdiction is one, such as 

Switzerland, which supervises its insurers consistent with Solvency II practices and 

standards, i.e. global group capital, reporting and governance. 

Solvency II and its supervisory approach matter because, in terms of premium volume, 

the EU's consolidated insurance market is the largest in the world. However, as the 

world's largest single nation insurance market, U.S. insurance authorities have 

repeatedly refused to submit to the formal EU Solvency II equivalence process. The 

United States has long-held that the United States substantively and structurally 

regulates its insurance sector as the United States determines appropriate, just as the 

EU determines how to supervise the insurance sector within the EU. 

However, the United States has also long known that failure to resolve the Solvency II 

"equivalence" issue could result in: (1) U.S. reinsurers losing opportunities in the EU 

reinsurance market, and (2) U.S. primary insurers being forced to satisfy Solvency II 

global group capital, reporting and governance criteria that are far different, and far 

more costly, than current regulatory practices in the United States. In the absence of a 

resolution, U.S. insurers operating in the EU face potentially billions of dollars in 

Solvency II compliance costs. 

2 
51 


27201.012

As the EU moved to implement Solvency II and U.S. insurance stakeholders learned 

more about the potential negative impact on U.S. reinsurers and insurers, state 

regulators continued the massive (albeit piecemeal) effort to reform reinsurance 

oversight, an initiative that should be applauded for its embrace of a risk-based 

framework. Nevertheless, in exchange for this reform, state regulators received nothing 

of benefit for U.S.-based insurers and reinsurers operating in the EU. Nothing. 

After difficult and contentious negotiations that began in early 2016, the Covered 

Agreement will resolve these long-standing issues. The Covered Agreement will remove 

excessive unnecessary regulation of the global reinsurance industry in both markets, 

open the EU reinsurance market to U.S. reinsurers, and relieve U.S. primary insurers of 

potentially billions of dollars in Solvency II compliance costs. 

While providing a balanced outcome with an equally meaningful outcome for the EU, 

the Covered Agreement puts America's interests first. U.S. consumers, industry and the 

U.S. national economy will benefit because of the Covered Agreement. 

Covered Agreement Negotiations- Process and Transparency 

U.S. state regulators, most of whom are appointed and serve at the will of a state 

Governor, have never before been directly included in the negotiating delegation for a 

U.S. international agreement. In recognition of the unique role of the states in 

insurance sector oversight, and even though not required by law, the Covered 

Agreement negotiation process created an unprecedented mechanism for state 

regulator participation. 

Treasury and USTR asked the state regulators to establish a small covered agreement 

task force of commissioners, and allowed the state regulators to determine the size and 

membership of the task force. 

State regulators were invited to, and did, participate in every Covered Agreement 

negotiating session. 

State regulators were invited to, and did, share perspectives, technical insights, and ask 

questions during U.S. delegation preparations in advance of any Covered Agreement 

negotiating session. 

State regulators were consulted throughout the Covered Agreement negotiation 

process, including during any Covered Agreement negotiating session. During the 

Covered Agreement negotiations, a state regulator sat at the table with the U.S. 

delegation and frequently provided technical insights. 

Through a confidential web portal established for purposes of Covered Agreement 

negotiations, state regulators received all documents offered by the EU shortly after 

those documents were received by Treasury and USTR. 

3 
52 


27201.013

Through the same confidential web portal, state regulators received all U.S. Covered 

Agreement documents before those documents were provided to the EU. 

Before any U.S. Covered Agreement document was provided to the EU, state 

regulators were invited to, and did, participate in a telephone call with Treasury and 

USTR to provide feedback and insight, and to ask questions. These telephone 

calls frequently offered important insights and perspectives that were incorporated 

into, or addressed in, the U.S. Covered Agreement document before that document was 

provided to the EU. 

Prior to my departure from Treasury, both Treasury and USTR expressed appreciation 

to Wisconsin Commissioner Nickel and his colleagues from California,Texas, Missouri, 

Florida, Vermont, Tennessee, Kentucky, Maine and Montana for their constructive input 

and insights provided throughout the Covered Agreement negotiation. These 

regulators, including Commissioner Nickel, should be commended for contributing 

substantial time and energy to the Covered Agreement negotiations even while tending 

to the business of insurance in their home states and to the various NAIC activities in 

which they are engaged. 

In addition, throughout the Covered Agreement negotiations, Treasury and USTR 

consulted extensively with the four Committees of jurisdiction in Congress. These 

consultations occurred in person and by telephone, and occurred before negotiations 

began, before and after each negotiating session, and before the negotiations and the 

Covered Agreement were finalized. 

Treasury and USTR also extensively consulted with private sector stakeholders, 

particularly those U.S. insurers and reinsurers with operations in the EU. 

Treasury and USTR also worked closely with the entire U.S. Covered Agreement 

negotiating delegation which, in addition to Treasury and USTR and the state 

regulators, also included the Departments of Commerce and State, and the Board of 

Governors of the Federal Reserve System. 

This extensive transparency and stakeholder engagement supported and informed the 

joint Treasury and USTR effort throughout the Covered Agreement negotiations. 

Credit for Reinsurance Reform- Removing Excessive Regulation of a Global 

Industry 

The reinsurance industry largely manages risk on a global basis. The reason is 

obvious: in order to avoid concentration of risk from natural catastrophes, or from a 

mass epidemic, reinsurers spread capital to different areas and continents. Insurance 

supervisors support this approach in order to promote affordable and reliable 

4 
53 


27201.014

reinsurance markets and, in turn, to promote the affordability and accessibility of 

insurance products to working families and small businesses throughout the United 

States. 

The Covered Agreement will support the U.S. state-based initiative to reform 

reinsurance regulation. In fact, the 32 U.S. states that have adopted reinsurance 

collateral reform already provided collateral relief to 31 non-U.S. reinsurers. Of those 

31, 30 now hold 10% or 20% of the collateral required under prior state laws. The state 

regulators' adoption of the NAIC Model Law and Regulation as an accreditation 

standard, effective January 1, 2019, means that all states would be expected to adopt a 

substantially similar reform in the next two years. 

If domiciled in a non-equivalent country, a reinsurer operating in the EU could be 

subject to EU member state laws that require collateral or a local presence. U.S. 

reinsurers were experiencing this burden in full force: at least two EU member states, 

with more in process, required that U.S. reinsurers either establish a subsidiary or 

operate in the EU member state only without the use of brokers. Beginning in mid-2016, 

U.S. reinsurers were losing existing EU clients and missing new opportunities in the EU. 

The Covered Agreement eliminates collateral and local presence requirements for 

EU reinsurers operating in the United States and U.S. reinsurers operating in 

the EU, thereby eliminating excessive reinsurance regulation in both markets and 

establishing a new paradigm for oversight of this essential global industry. 

It the Covered Agreement conditions are met, current collateral requirements for EUbased reinsurers will be eliminated within 60 months from the date the Covered 

Agreement enters into force or, perhaps, as early as mid-2023. U.S states, therefore, 

have sufficient time within the NAIC's existing plan for accreditation (i.e. January 1, 

2019), to conform all state laws to the terms of the Covered Agreement, thereby 

rendering unlikely the need for FlO preemption of state law. 

In addition, if the Covered Agreement conditions are met, current local presence 

requirements for U.S. reinsurers in the EU (or EU reinsurers in the United States) will be 

eliminated within two years from the date of signature. Due to the successful 

conclusion of the Covered Agreement negotiations, EU member states that were 

imposing local presence requirements on U.S. reinsurers have already agreed to 

forbear from enforcing compliance. 

In addition, by imposing meaningful reporting requirements coupled with the potential 

for re-imposition of local presence or collateral requirements, the Covered Agreement 

enhances the protections available to primary insurers and consumers in both the EU 

and the United States. For example, a reinsurer must confirm in writing that it consents 

to the jurisdiction of the courts where the primary insurer is domiciled, and must consent 

in writing to pay all final and enforceable judgments wherever enforcement of that 

judgment is sought Also, reinsurers must maintain a practice of prompt payment, and 

can be required to report to the ceding insurer's supervisor semi-annually with an 

5 
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27201.015

updated list of all disputed and overdue reinsurance claims outstanding for 90 days or 

more. 

These protections, and the myriad others contained in the Covered Agreement, apply to 

U.S. reinsurers operating in the EU and to EU reinsurers operating in the United States. 

In exchange for these enhanced consumer protections, the EU and U.S. reinsurance 

markets will be open to non-domestic competition in an unprecedented manner, thereby 

providing free market opportunities that will meaningfully benefit ceding insurers and 

insurance consumers. 

Finally, and importantly, the Covered Agreement provides that U.S. state law and 

regulation (and EU law and regulation) can revert to its prior form if the Covered 

Agreement is terminated. Termination of the Covered Agreement will allow for the "snap 

back" of collateral or local presence requirements, precluding the prospect that the EU 

or United States could benefit from the Covered Agreement despite failing to comply 

with its own obligations. See Article 3, paragraph 9. 

Group Supervision- EU- U.S. Mutual Respect Finalized 

The Covered Agreement describes group supervision practices in a manner that 

accommodates the distinctly different approaches of the United States and the EU. 

Notably, the group supervision practices of the Covered Agreement apply only to those 

insurers operating in both the EU and the United States. 

Through the Covered Agreement, the EU and the United States acknowledge that 

supervisors of the jurisdiction in which the insurer or reinsurer is domiciled are the only 

supervisors with authority to supervise the insurer or reinsurer at the global group level. 

The Covered Agreement does not require either the United States or the EU to change 

group supervision practices. The Covered Agreement does, however, ensure that EU 

and U.S. regulators can continue with those jurisdiction-specific practices that protect 

consumers and promote financial stability. 

The Covered Agreement group supervision practices memorialize the mutual respect 

shared by the EU and the United States, and comprise explicit recognition that neither 

the EU nor the United States will change insurance oversight systems and structures 

just because of the other. As a factual matter, supervisors in both jurisdictions have 

adopted, or pursued, practices that originated with the other. For example, U.S. state 

regulators began development of an Own Risk Solvency Assessment (ORSA) based on 

the idea as it originated with the EU. Over time, U.S. state regulators adopted the ORSA 

but in a U.S.-specific way. At the same time, EU supervisors have studied the U.S. state 

regulators' approach to the collection, compilation and publication of insurance industry 

data, and are developing a manner and system of insurer reporting that, while different 

from the U.S. state approach, is premised upon U.S. state-based concepts and 

practices. 

6 
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27201.016

Beginning in 2014, U.S. state insurance regulators, through the NAIC, began 

development of a group capital calculation for U.S. insurers and reinsurers. This 

initiative reflects a growing awareness among international insurance supervisors, 

including at the U.S. state level, that a common group capital standard for multi-national 

insurers will allow for non-domestic insurance regulators to protect consumers and 

promote financial stability within their jurisdictions. Although the NAIC group capital 

initiative has been under development for over two years, it remains in the early phases 

as state regulators evaluate alternative approaches both to the scope and the technique 

for the calculation. 

It is clear, however, that the NAIC's group capital calculation will not amount to a group 

capital requirement, and will not require capital to be held by U.S.-based insurers and 

reinsurers in any place other than the insurance legal entities over which state 

regulators have authority. The Covered Agreement confirms these two facts, and 

provides U.S. state regulators with flexibility to build the U.S. group capital calculation 

on specifications that they determine appropriate. See Article 4, paragraph h. 

To repeat for clarity, the Covered Agreement only requires that U.S. state regulators 

proceed with group capital work already underway at the NAIC, and does not specify 

how that work should conclude. To be abundantly clear, the Covered Agreement would 

not require that U.S. state regulators develop an approach that requires capital to be 

held outside of an insurance legal entity, and the reference to "corrective, preventive, or 

otherwise responsive measures" merely restates existing state-based insurance holding 

company laws. Indeed, to repeat again for clarity, the Covered Agreement further limits 

the application of the state regulators' group capital calculation to a much smaller group 

of U.S. insurers and reinsurers (i.e. only those operating in the EU) than presently 

contemplated by the state regulators. 

Importantly, just as the United States sought respect for the U.S. approach to its group 

capital calculation, the Covered Agreement is also drafted in a manner that 

accommodates and expresses respect for the EU approach to a global group capital 

requirement. 

The Covered Agreement limits the application of the EU's Solvency II global group 

supervision practices to the operations and activities of U.S. insurers that occur in or 

originate from the EU. While the same limitation of U.S. law also applies to EU insurers 

operating in the U.S. market, it is the limitation on the application of Solvency II that 

saves U.S. insurers potentially billions of dollars in additional compliance costs. The 

savings for U.S. insurers and reinsurers will benefit U.S. insurance consumers through 

increased affordability, increased insurer investment in the U.S., and more efficient use 

of the capital that would otherwise be tied to Solvency II compliance. 

The Covered Agreement will provide insurers and reinsurers that operate in both the 

United States and the EU the long-sought clarity and certainty with respect to the 

relationship between the two different supervisory approaches. The Covered 

Agreement incorporates, and memorializes, shared mutual respect between the EU and 

7 
56 


27201.017

the United States, and will close with finality issues between the United States and the 

EU that have been pending for more than a decade. 

Reinsurance and Group Supervision Issues Resolved with Finality 

Neither the United States nor the EU can benefit from the terms of the Covered 

Agreement without also providing to the other the benefits of the Covered Agreement 

In other words, the provisions of the Covered Agreement are cross-conditionaL If the 

United States fails to perform on the reinsurance reforms, then the EU need not comply 

with the group supervision practices. If the EU does not comply with the group 

supervision practices, then the United States need not comply with the reinsurance 

reforms. 

The cross-conditional nature of the Covered Agreement incentivizes supervisors in both 

the EU and the United States to comply with the terms. For this reason, among others, 

the Covered Agreement does not need to be clarified with further written materials. This 

would be a fool's errand. The Covered Agreement terms, painstakingly negotiated, are 

abundantly clear, even if not written to resolve every stakeholder's nuanced fantasies. 

To the extent that the EU and the United States have questions about interpretation or 

implementation in the coming years, the Covered Agreement establishes a Joint 

Committee to address and resolve any open question. This Joint Committee 

mechanism, not unlike those established to implement other international agreements, 

would allow for both broad and targeted subjects to be addressed in a collaborative 

manner, again a reflection of the shared substantial and mutual benefits of the Covered 

Agreement 

If both the EU and the United States comply with the Covered Agreement terms, then 

the Covered Agreement becomes permanent and finaL See Article 10, paragraph 1. 

Federal Insurance Office 

After the financial devastation wrought by the financial crisis, and in recognition of the 

central role of a U.S. insurer in that devastation, Title V of the Dodd-Frank 

Consumer Protection and Wall Street Reform Act established FlO to complement the 

work of the states with respect to the U.S. insurance regulatory system. 

FlO, an office within Treasury, has statutory authority to represent the United States on 

prudential aspects of international matters. In doing so, FlO has worked closely with the 

professionals at the Board of Governors of the Federal Reserve System, state 

regulators, and staff at the NAIC. By working with our U.S. and international 

counterparts, FlO built consensus in the development of international standards that 

incorporates views accommodating the substance and structure of the U.S. insurance 

regulatory system. 

8 
57 


27201.018

FlO's collaborative domestic and global leadership has served the best interests of U.S. 

insurance consumers, industry, and the U.S. economy. Make no mistake- U.S. 

leadership in the global insurance sector is more important and necessary now than at 

any time before. 

This is a time of rapid globalization within the insurance sector as developing 

economies around the world seek private capital and insurance products to provide the 

same benefits to their populations that the industry provides in the United States. These 

are profoundly meaningful opportunities for organic growth for U.S.-based insurers and 

reinsurers. As each year passes, these reasons for U.S. global engagement and 

leadership become more obvious and more important. 

FlO has afforded the United States insurance sector its most coordinated, forceful and 

effective global representation. Choosing otherwise puts American interests far in the 

rear. The debate of whether the U.S. federal government, including FlO, should have a 

role in U.S. insurance sector oversight is a bygone relic, a debate from another era, and 

fails to recognize that the U.S. insurance industry, in all of its diversity, deserves 

prominent U.S. leadership on important global insurance matters. To the extent 

the debate remains, the actual salient question is whether the United States prefers to 

lead or to follow. 

If the United States does not engage, or lead, then the United States cedes the 

development of regulatory concepts to other jurisdictions. The global insurance 

community will not wait for the United States if we repeatedly re-hash the currently 

unchallenged merits of the McCarran-Ferguson Act. 

Further, FlO has played an essential role in domestic oversight of the insurance sector. 

FlO has published 16 reports, including on topics relating to insurance consumer 

matters. This work highlights the state-by-state differences and the impact of those 

differences on the insurance industry and the American people. Industry and consumers 

have a shared interest in efficient, well-regulated and competitive markets, and FlO's 

reports on the domestic and global industry should continue to facilitate policymaker 

analyses. 

Too often some posit that the choice between consumer protections and industry 

interests is binary, a zero sum proposition. FlO's reports, and FlO's engagement on 

broader domestic issues of insurance public policy, have been premised upon a 

balanced and factual dialogue that improves insurance sector oversight. 

FlO has also engaged domestically in a broad range of matters, including retirement 

security, resilience to severe weather events, cyber-security, implementation and 

interpretation of the 2015 terrorism risk insurance program, as well as nuts and bolts 

insurance projects such as flood insurance and long-term care insurance. 

As an industry of $8.5 trillion in assets (2015 total) in the United States, and 

a critical tool for all aspects of American personal and commercial activity, the insurance 

9 
58 


27201.019

industry deserves a prominent place in Treasury, and the U.S. Executive Branch of 

government. FlO's statutory authorities serve as a perfect complement to the 

limitations of state regulatory authority. To view FlO differently diminishes the 

importance the insurance sector in the United States and minimizes the significance of 

the insurance issues confronting the American people. In other words, without 

threatening the regulatory role of the states, Federal leadership, including through 

Congress. will continue to be necessary to address important insurance issues of 

national and global interest. 

Conclusion 

Treasury and USTR pursued a Covered Agreement that would memorialize the obvious 

prerogative of the United States to determine the substance and structure of U.S. 

insurance oversight. In addition, Treasury and USTR sought a Covered Agreement that 

would provide meaningful benefits for U.S. insurers, reinsurers, consumers, and for the 

U.S. economy. 

At every point in the Covered Agreement negotiation, Treasury and USTR prioritized the 

best interests of U.S. consumers, U.S. insurers and the U.S. economy. While providing 

equally meaningful benefits for the EU, this Covered Agreement achieves every U.S. 

goal. 

Chairman Duffy, Ranking Member Cleaver, thank you for the courtesy and respect that 

you showed to me throughout my FlO tenure. I valued the chance to work with this 

Committee and its excellent staff, including your predecessors, and always benefited 

from our interaction. 

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

10 
59 


27201.020

Testimony of 

Ted Nickel 

Commissioner 

Office of the Wisconsin Commissioner of 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: 

Assessing the U.S.-EU Covered Agreement 
60 


27201.021

Thank you Chairman Duffy, Ranking Member Cleaver, and members of the subcommittee. My 

name is Ted Nickel. I serve as insurance commissioner for the state of Wisconsin and current 

president of the National Association of Insurance Commissioners (NAIC). I greatly appreciate 

your invitation to testifY before you regarding the covered agreement between the European 

Union and the United States. 

The NAIC is committed to working with Congress and the administration to address disparate 

regulatory treatment some EU jurisdictions are imposing on U.S. insurers doing business in the 

EU. While a covered agreement is one way to resolve these issues, we oppose this current 

covered agreement as drafted. We urge Congress and the administration, with direct involvement 

of states, to expeditiously reopen negotiations with the EU to reach an agreement which brings 

finality to these issues, and better protects U.S. policyholders, companies, and our state 

regulatory system. 

In September, my colleague Tennessee Insurance Commissioner Julie Mix McPeak outlined for 

this subcommittee concerns state insurance regulators had with discriminatory actions EU 

member countries were taking against U.S. firms under the auspices of implementing the EU's 

new Solvency II regime, lack of necessity for a potentially preemptive covered agreement to 

resolve concerns relating to those actions, lack of transparency to Congress and stakeholders 

regarding the nature and progress of the covered agreement negotiations, and lack of meaningful 

inclusion of state insurance regulators in this process. 1 This agreement, as drafted, does little to 

resolve those concerns. 

While state insurance regulators recognize the U.S. received some limited benefits, this 

agreement does not provide for fu II or permanent equivalence or recognition of our time-tested 

regulatory system, nor does it provide certainty for our U.S. insurance sector. Instead, in a single 

agreement with an outgoing administration, the EU achieved its primary objective of eliminating 

U.S. reinsurance collateral requirements designed to protect U.S. consumers. In return, U.S. 

companies and our regulatory system received only a form of "probation" limited relief from 

prescriptive European regulation but under a continued threat where any relief could be revoked 

if we fail to meet Europe's ongoing expectations and standards. And the burden for this probation 

is placed almost entirely upon the states, and its underlying costs ultimately will be paid for by 

U.S. policyholders. My state insurance regulator colleagues and I seriously question whether this 

agreement meets statutory standards for a covered agreement set forth in the Dodd-Frank Act, 

which requires such agreement contain measures which are substantially equivalent to the level 

of protection achieved under state insurance or reinsurance regulation. 2 Indeed, substantive 

operative provisions of this agreement do not meaningfully address or even reference consumer 

protection. 

Issues addressed by this covered agreement are entirely of the EU's own making (and could be 

unilaterally resolved by the EU changing its law on equivalence) but they are being solved 

1

United States. Cong. House. Financial Services Subcommittee on Housing and Insurance. Hearing on the Impact of 

the US-EU Dialogues on US. insurance Markets. September 28,2016. 114'" Cong. 2"' sess. Washington: GPO, 

2016 (statement of Julie Mix McPeak, Commissioner, Tennessee Department of Commerce and Insurance) 

2 31 U.S.C. § 313 
61 


27201.022

entirely at the expense of U.S. industry, consumers and regulators. In spite of this imbalance, 

state regulators arc nevertheless unanimously committed to resolving these issues, even if it 

means a revised federal agreement, so U.S. firms are not put at a competitive disadvantage when 

operating in the EU. However, as drafted, this covered agreement is not the answer and we urge 

the Trump administration to reopen negotiations with the EU to obtain a better deal for the 

United States. State regulators can support an agreement which achieves clear and permanent 

mutual recognition for our time-tested U.S. insurance regulatory system, includes meaningful 

state regulator input and transparency in its drafting and execution, and is unambiguous in its 

terms and finality. This covered agreement fails to meet any of those objectives, and we hope 

members of Congress will join us in calling for the expeditious reopening of negotiations. 

This Agreement Provides Limited Benefit to the U.S. Insurance Sector 

As you are aware, on November 20, 2015, the previous administration's Treasury Department 

and the Office United States Trade Representative (USTR) notified Congress they intended to 

initiate negotiations to enter into a covered agreement with the European Union. 3 They made it 

clear they would not enter into a covered agreement unless terms of the agreement were 

beneficial to the United States and state insurance regulators would have a meaningful role 

during the covered agreement process. In that notification, the Treasury Department and USTR 

set out the following negotiating objectives: 

1) "treatment of the U.S. insurance regulatory system by the EU as 'equivalent'" under 

Solvency II ''to allow for a level playing field for U.S insurers and reinsurers 

operating in the EU;" 

2) "recognition" by the EU of the U.S. insurance regulatory system, including with 

respect to group supervision; 

3) "Facilitat[ion of the] the exchange of confidential regulatory information between 

lead supervisors across national borders;"4 

4) "nationally uniform treatment of EU-based reinsurers operating in the United States, 

including with respect to collateral requirements;" and 

5) "permanent equivalent treatment of the solvency regime in the United States and 

applicable to insurance and reinsurance undertakings." 

The previous administration failed to meet several of these objectives. While we recognize the 

agreement appears to provide some benefit to U.S. insurers operating in the EU by eliminating 

EU local presence requirements over time, this agreement does not require the EU to grant the 

U.S. permanent equivalence (or comparable treatment), and in fact, the word "equivalence" is 

nowhere to be found in the document. This means, even post covered agreement, insurers based 

in Bennuda or Switzerland, for example, (which have received equivalence) receive greater 

benefits from the EU than U.S. insurers. So even under this agreement, the United States, one of 

the most sophisticated and well-regulated insurance marketplaces on the globe, continues to be 

3 Wall, Anne. Harney, Michael. Letter to Congress Re: Initiation of Covered Agreement Negotiations, 20 Nov. 

2015. 

4 The agreement encourages, but does not require, supervisory authorities to cooperate in exchanging information 

while respecting a high standard of confidentiality protection. It appears to do little of substance in relation to laws 

or procedures related to infonnation exchange. 

2 
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27201.023

treated by Europe as a parolee. We remain under suspicion, we continue to be monitored, and 

whatever freedoms afforded by this agreement can be revoked. 

Similarly, this agreement also fails to grant full "recognition" by the EU of the U.S. insurance 

regulatory system, including with respect to group supervision. While this agreement appears to 

prevent the EU from imposing its requirements on the "worldwide parent" located in the United 

States, it does not provide promised "recognition" or require the EU to recognize the U.S. as 

equivalent. Further, the language is ambiguous as to the obligations of the parties and the entities 

to which it applies (e.g., the insurance group, the insurance and non-insurance group, the legal 

entities, or a combination). Troubling, this agreement also places conditions on the ability of 

regulators to obtain information or take certain actions currently authorized under state laws. 

Indeed, there are potential conflicts between provisions and limitations in this agreement and 

existing state reporting processes as well as critical examination and hazardous financial 

condition authority. 

In addition, many key terms describing the circumstances which would prompt action by 

regulators to comply with this agreement are undefined or ambiguous. For example, the 

agreement acknowledges a need for a group capital requirement or assessment, but it also 

requires "the authority to impose preventive, corrective, or otherwise responsive measures on the 

basis of the assessment, including requiring, where appropriate, capital measures."5 The 

provision implies state insurance regulators are effectively required to develop and adopt a group 

capital requirement but also includes language suggesting the EU could apply its own group 

capital requirements and re-impose local presence requirements if states choose not to act. In 

other words, this agreement seems to compel states to subject a broad group of insurers to 

additional regulation with no guarantee the EU ultimately would not apply its own layer of 

requirements if it finds the additional U.S. approach to be unsatisfactory. 

This agreement is littered with ambiguities such as these and they would have to be resolved by 

an undefined "Joint Committee" composed of representatives of the U.S. and EU. This 

agreement does not set torth how many representatives will compose the Joint Committee or 

indicate which persons or bodies will be represented. Importantly, there is no mention of a role 

for state insurance regulators, who are charged with implementing much of this agreement and 

whose laws and regulations may be directly impacted or preempted. We are already aware of 

agreement provisions the U.S. and EU negotiators interpret differently. If a meeting of the minds 

cannot be reached on these ambiguities, this agreement may be voided -under its terms, if any 

single provision of this agreement is violated, the other party is not obligated to follow other 

provisions of this agreement. This framework inevitably will lead to perpetual renegotiations 

through the Joint Committee and uncertainty for U.S. industry, policyholders, and regulators. 

The one objective met was a key negotiating priority for the EU, elimination of reinsurance 

collateral requirements. In fairness, this covered agreement retains a few of the clements from 

the NAJC's Credit for Reinsurance model laws, including requirements with respect to 

enforcement of final U.S. judgments, service of process, financial reporting requirements, 

prompt payment of claims, and solvent schemes of arrangement. These requirements are also 

5 Bilateral Agreement between the European Union and the United States of America on Prudential .Heasures 

Regarding Insurance and Reinsurance, January 13,2017, p. 12. 

3 
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27201.024

applicable to U.S. reinsurers doing business in the EU, and collateral may be imposed if these 

requirements are not met under a process established in this agreement. However, this agreement 

does not include any evaluation of reinsurer creditworthiness and despite the Treasury 

Department having verbally committed it would never accept an agreement which eliminates 

reinsurance collateral, it did exactly that. 

Collateral is not just some illusory consumer protection. Reinsurance capital moves quickly 

worldwide in search of attractive returns. It is important; as we have seen when catastrophes 

strike, to have solid assurances that claims will be paid immediately. Existence of collateral 

provides strong incentives for reinsurers to perform on their obligations and regulatory 

requirements to protect all insurers, particularly smaller insurers who may not have the leverage 

to renegotiate and require it contractually from reinsurers with whom they do business. Even 

though the probability of failure may be low, particularly for large, financially sound, 

international reinsurers, the impact of failure could be catastrophic to U.S. ceding insurers and 

policyholders in the absence of collateral as a safety net. It is understandable some may argue 

financially strong reinsurers should not have to post collateral, but many non-U.S. reinsurers who 

failed (e.g., Gerling, Trenwick, Legion) were considered paragons of stren1,'lh only a few years 

before their collapse. 6 

Though we believe it is necessary for countcrparties to have "skin in the game" (a lesson the 

financial system was reminded of during the financial crisis with respect to other financial 

instruments), we have nevertheless attempted to be responsive to the European insurance 

industry and governments who have sought reduction of such requirements. We have worked 

tirelessly to reduce collateral requirements by amending NAIC's Credit for Reinsurance Model 

Act to allow for reduction in collateral based on the strength of the insurer and its regulatory 

regime. The amendments have already been adopted by 35 states representing approximately 69 

percent of direct written premium and will become an accreditation requirement on January 1, 

2019, leading to further adoption hy states. In fact, based on these changes, the amount of 

collateral posted by EU reinsurers has dropped dramatically. In 2015, EU-based reinsurers 

posted only $31.4 billion or 15.4 percent of the almost $205 billion in collateral posted 

worldwide, but when you consider collateral represents significantly larger commitments to U.S. 

policyholders, retaining some collateral is a reasonable approach. While we are open to further 

discussions on collateral reduction and even changes to our present credit for reinsurance 

construct, wholesale elimination of this regulatory requirement to benefit foreign reinsurers 

should be weighed more thoughtfully against potential harm to U.S. companies and consumers. 

With absence of collateral, regulators will have to find other mechanisms with which to protect 

insurers and their policyholders from the risks posed by counterparties such as reinsurers 

possibly including new capital charges or restrictions imposed on ceding insurers. This covered 

agreement will essentially transfer credit risk of foreign reinsurers to their customers: U.S. 

insurance companies, and by extension, U.S. policyholders. 

6 U.S. Reinsurance Collateral, NAJC Reinsurance Task Force of the Financial Condition (E) Committee, March 5, 

2006,p. 19. 

4 
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27201.025

The Process was Flawed 

The poor results achieved during this negotiation are not surprising because the process was 

flawed from the outset. Following notification to Congress, the Treasury Department and USTR 

negotiated for over a year behind closed doors. Unlike a trade agreement, which is subject to 

established procedures for consultation and input from the states and a vote by the Congress, 

there was no formal consultation with a broader group of U.S. stakeholders including industry 

and consumer participants. State regulators were assured we would have direct and meaningful 

participation in this covered agreement process, but the small group of us included in the process 

were merely observers, only one allowed in the room at a time, subject to strict confidentiality 

with no ability to consult our staff and fellow regulators. This agreement was finalized in the 

waning days of the previous administration and announced on January 13, 20 17-a week after 

the former Federal Insurance Office director had announced his resignation effective January 

20th. The process was also skewed in favor of the EU from the beginning by the fact that it 

retained the ability to approve the agreement by the European Parliament and the European 

Council, whereas the U.S. retained virtually no congressional vetting authority prior to possible 

preemption of U.S. insurance regulations. 

This was a flawed process which produced a flawed document. Instead of an agreement 

negotiated by subject matter experts from the U.S. accountable to the consumers and markets 

they represent, we have an agreement mostly negotiated by Treasury bureaucrats in the waning 

days of an outgoing administration. This agreement sets a precedent others around the world may 

try to imitate and, put in the simplest terms, forces U.S. acquiescence which weakens our 

standards in exchange for very little. Treasury and USTR stated they would not enter into a 

covered agreement unless the terms were beneficial to the U.S. They failed to meet that 

objective. 

A Path Forward 

Notwithstanding this specific agreement does not sufficiently benefit the U.S insurance sector, 

state insurance regulators remain committed to working with the administration, EU, Congress, 

and stakeholders to negotiate one which does. We would like the administration to expeditiously 

establish a negotiation process which is more transparent, allows for more robust congressional 

and stakeholder engagement, and provides actual meaningful and direct participation by 

insurance regulators including the ability for all impacted regulators to review terms as they 

develop. States are the primary regulators of the insurance sector and would have to implement 

provisions of any agreement. Our involvement and buy-in is essential to its success. In terms of 

specific substantive improvements, we would expect any agreement to provide for permanent 

mutual recognition, equivalence, or comparable treatment for U.S. firms operating in the EU, full 

recognition of the U.S regulatory system and its approaches to group supervision and capital, 

clarity in the agreement's terms, and finality in its application. We recognize that the EU would 

have expectations regarding collateral and state insurance regulators would be open to making 

further changes to our credit for reinsurance laws to address those demands, but any approach we 

would seek would remain risk-based to ensure U.S. insurers and policyholders were adequately 

protected. 

5 
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27201.026

Conclusion 

We are aware this agreement has its proponents, but we should not confuse any deal with a truly 

beneficial deal, and we perceive benefits of this agreement to be fleeting and illusory. Our 

request to renegotiate is not made lightly, or a case of making the perfect the enemy of the good. 

A renegotiation of this agreement using a better, more transparent process led by an 

administration which is not in its final days, with full participation of insurance regulators will 

lead to a better result for the United States. Working together with this current administration and 

Congress, we believe we can achieve the finality, certainty, and recognition lacking in this 

current agreement without sacrificing key consumer protections. Thank you for this opportunity 

to testify today and I would be pleased to take your questions. 

6 
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27201.027

Testimony of 

leigh Ann Pusey, President and CEO 

American Insurance Association 

Before the House Financial Services Committee 

Subcommittee on Housing and Insurance 

Hearing entitled "Assessing the U.S.- EU Covered Agreement" 

February 16, 2017 

Chairman Duffy, Ranking Member Cleaver, Members of the Subcommittee, thank you for the 

opportunity to testify on behalf of the American Insurance Association (AlA) to provide our 

assessment of the Covered Agreement entered into by the United States (U.S.) and the 

European Union (EU). 

Celebrating its 150th year in 2016, AlA is the leading U.S. property-casualty insurance trade 

organization, representing approximately 320 insurers that write more than $125 billion in U.S. 

property-casualty premiums each year. AlA member companies offer all types of property -

casualty insurance, including personal and commercial auto insurance, commercial property 

and liability coverage, specialty, workers' compensation, homeowners' insurance, medical 

malpractice coverage, and product liability insurance. AlA's membership includes U.S. insurers 

that write insurance only within the U.S., U.S. insurers that write insurance inside and outside 

the U.S. (including in the EU), and the U.S. subsidiaries of multi-national insurers. This 

membership diversity gives AlA the ability to analyze issues from many perspectives and 

enables us to draw on the global experience and expertise of our companies with many forms 

of insurance regulation. 

AlA believes that the new international agreement on insurance and reinsurance prudential 

measures is a win for industry and for the U.S. system of insurance regulation. It gives 

international recognition to the state-based insurance regulatory system and provides U.S. 

insurers and reinsurers the badly-needed certainty that they will no longer face discriminatory 

regulatory measures in the EU. Equally important, it sets a valuable precedent that will protect 

the state regulatory system from future attempts to import inconsistent or conflicting 

international regulatory standards. 

The U.S. Treasury's Federal Insurance Office (FlO) and the U.S. Trade Representative (USTR) 

announced in November 2015 that they would enter into negotiations for a "Covered 

Agreement" on insurance prudential matters with the EU. On January 13, 2017, they revealed 

that those negotiations were complete, and submitted the Agreement to Congress. U.S. state 

insurance commissioners played a significant role advising the U.S. negotiators every step of 

the way, and through their efforts, the agreement affirms our state-based system of regulating 
67 


27201.028

insurance, incorporating key aspects of existing NAIC models and state provisions along the 

way. 

The deal could not have come too soon. Since the EU's Solvency II Directive was activated on 

January 1, 2016, U.S. (re)insurance groups that do business in the EU have faced increasingly 

discriminatory regulations from EU Member State governments. Unnecessary regulatory 

divergence between the U.S. and EU quickly turned into market access barriers as U.S.-based 

reinsurers were told they could not offer reinsurance in the EU, and U.S. insurance groups 

were threatened with onerous, duplicative regulatory requirements arising from their 

operations in the EU. 

By upholding the U.S. system of state-based insurance regulation, the Covered Agreement will 

re-establish a level playing field for U.S. insurers and reinsurers competing in the EU, requiring 

regulatory treatment of U.S. groups in the EU to be no less favorable than the treatment 

received by EU (re)insurers. Specifically, the Covered Agreement limits "global" group 

supervision to the home country supervisor, meaning U.S. insurers operating in the EU will be 

subject to applicable worldwide prudential insurance group oversight .QDJy by their home U.S. 

supervisor. In addition, it guarantees that EU regulators will no longer tell U.S. reinsurers that 

they have to establish a local presence in each EU country to do business there. In this way, the 

Agreement fosters a climate of reciprocal regulatory respect in the EU and the U.S., which will 

lead to a better operating environment in the world's two largest insurance markets. 

The recognition afforded to the U.S. state-based system is also a victory for U.S. consumers and 

policyholders. Allowing market access to more companies under the Agreement's conditionsboth in the U.S. and the EU improves consumer choice and expands insurance and 

reinsurance availability. Equally important, our regulatory system is predicated on policyholder 

protection and, through the Covered Agreement, the EU is explicitly acknowledging the value of 

that approach for those insurance and reinsurance groups that call the U.S. home. 

Additionally, the Covered Agreement is an alternative to submitting to the EU's "equivalence" 

process a European legal process that provides benefits to insurance and reinsurance groups 

from countries that are willing to model their regulatory frameworks on the EU's Solvency II 

Directive. Rather than requiring significant changes to the U.S. state regulatory architecture, 

the Covered Agreement allows regulators on both sides to rely on the existing structure in each 

other's jurisdictions while at the same time providing the fair treatment guaranteed to 

"equivalent" jurisdictions. 

It is important to note that it was the view of U.S. negotiators, including U.S. state insurance 

commissioners, not to enter into the EU's Solvency II "equivalency" process. On July 11, 2014, 

state insurance commissioners wrote to the European Commission confirming that the U.S. was 

not pursuing "equivalence," citing the significant changes to the U.S. supervisory system that 

such a path would entail and instead encouraging the Commission to reach an alternative 

"similar conclusion about the efficacy of our system."1 

1

Letter from NAIC International Relations Leadership Group to Jonathan Faull (Director General, European 

Commission) at p. 1 (July 11, 2014) ("As you know, U.S. state insurance regulators are not pursuing an equivalence 

determination. While it is possible to compare our respective statutory authorities on paper, it would be 

2 
68 


27201.029

Because of the Covered Agreement, the states preserve the current system without compliance 

with the burdensome Solvency II requirements for group global capital, reporting, and 

corporate governance. Indeed, in order to complete the "equivalence" process, U.S. 

supervisors would have had to develop a global group capital requirement that is similar in 

substance to the EU directive, rather than the group capital calculation initiative that is under 

development at the NAIC. 

Moreover, many of the provisions in the group supervision and reinsurance sections are drawn 

directly from state law and state insurance commissioners' models promulgated by the NAIC, 

including (as noted) the current efforts of U.S. state insurance regulators in developing a group 

capital assessment and reducing statutory reinsurance collateral requirements. Importantly, 

per the scope of the Agreement, it also covers only those U.S. (re)insurance groups that have 

EU operations and, by extension, only those states that supervise those U.S. groups. 

For "global" group capital in the U.S., the Agreement effectively accepts a group assessment or 

calculation as long as that assessment or calculation captures risk of the entire group (limited to 

insurance entities or those entities controlled by an insurance entity) and, consistent with 

current U.S. state law, the supervisor has the authority to take appropriate measures on the 

basis of the assessment. The Covered Agreement does not specify that the authority must 

extend to the entire group, however, and does not dictate what constitutes appropriate 

measures. 

In fact, the NAIC is currently in the process of developing a group capital calculation, which it 

calls the "inventory method." The inventory method leverages the U.S. risk-based capital (RBC) 

approach to assess group capital through an aggregation of legal entity capital requirements. 

That method is envisioned as a tool that can be used by state regulators in the supervisory 

college context to better assess the capital adequacy of a U.S. group's global insurance 

operations, and meets the conditions outlined in the Covered Agreement. 

The Covered Agreement also addresses the issue of reinsurance collateral. As stated in the 

Treasury Department's Fact Sheet, the Covered Agreement "eliminates collateral and local 

presence requirements for U.S. reinsurers operating in the EU insurance market, and eliminates 

collateral and local presence requirements for EU reinsurers operating in the U.S. insurance 

market, as a condition for and in connection with regulatory credit for reinsurance." As 

mentioned earlier, this provision guarantees that EU regulators will no longer tell U.S. 

reinsurers that they have to undergo the expense and duplication of opening local offices in 

each EU member state, in order to do business there. 

Although the Agreement, consistent with existing language in Title V of Dodd-Frank, does allow 

for a very narrow preemption process to accommodate for non-discriminatory state 

reinsurance law practices, it is not clear that the preemption process will need to be used at all. 

The Covered Agreement recognizes and utilizes the work done by the NAJC during the 

development of its model on credit for reinsurance. Over the past several years, 35 states have 

already begun reducing the levels of statutory reinsurance collateral requirements through 

challenging to conduct a comprehensive comparison of our two regulatory systems in practice until Solvency 2 is 

fully operational and the outcomes it produces based on actual experience are better understood.") 

3 
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27201.030

adoption of the NAIC's model law from 100 percent to between ten and twenty percent. 

Ultimately, each affected state will have 5 years to put in place those tools and provisions that 

effectuate the reinsurance and group supervision articles of the Agreement. If anything, those 

states have a head start because of the ongoing work on both issues fostered by the NAIC and 

individual state insurance commissioners. In addition, the NAIC has declared the credit for 

reinsurance model to be an accreditation standard on January 1, 2019, which will prompt the 

states to enact laws that will assure their accredited status well. It is our belief that without a 

provision to bring parity to the U.S. and EU (re)insurance markets, an agreement to recognize 

the U.S. state-based system for prudential regulation could not have been reached. 

However, as mentioned, the Agreement retains many protections that allow for states and 

insurers to maintain healthy and well-functioning reinsurance markets in their respective 

jurisdictions. First and foremost, the Covered Agreement explicitly acknowledges that 

contracting parties will continue to be able to negotiate for appropriate levels of reinsurance 

collateral as part of those reinsurance contracts. The Agreement also confirms that the new 

collateral requirements are to be applied prospectively to new contracts, borrowing language 

that was part of a unanimously adopted NAIC credit for reinsurance model. Moreover, the 

benefits of the Agreement only apply to EU reinsurers meeting certain capital and surplus 

requirements and who have a history of prompt payment of reinsurance claims and comply 

with financial statement filing requirements - conditions that, again, produced state regulatory 

consensus in developing the NAIC credit for reinsurance model. As discouragement against bad 

actors, the states also maintain the ability to require prompt payment of reinsurance claims. 

And should an EU reinsurer resist a state's final judgment of payment, the state will be able to 

require 100 percent collateral for all of that reinsurer's liabilities in the state. 

Having completed the first successful Covered Agreement negotiation, we now have the 

opportunity to reflect on both the product and the process. Given the fearful rhetoric that a 

Covered Agreement could become a back door to import broad swaths of European-style 

regulation, the Covered Agreement is ultimately proving to be a narrow, focused vehicle that 

compels the EU to recognize and respect the U.S. state-based system of insurance supervision. 

In fact, the Covered Agreement is proof that issues regarding prudential matters can be 

addressed while respecting local regulatory regimes. Importantly, the Covered Agreement 

advances the competitiveness of U.S. companies in the EU by providing a useful tool to resolve 

an international issue that was not originally foreseen when the Covered Agreement was 

conceived. 

While improvements can be made to the negotiating process going forward, AlA hopes that this 

Agreement can continue to be evaluated on its merits. Process should always be scrutinized so 

that it works for all stakeholders in the future. For our part, AlA consistently advocated for a 

significant role for U.S. state regulators. And in a development that was unprecedented in U.S. 

Government international negotiations, our understanding is that a group of state insurance 

commissioners, chosen by their peers, was given an official consultative role in the process; 

were provided access to negotiating texts from the EU and the opportunity to comment on all 

such texts and U.S. proposals before they were presented to the EU negotiators; and were able 

to view all proposals from the EU. 

4 
70 


27201.031

However, anything that can be done to increase transparency and stakeholder involvement 

while maintaining the integrity of negotiations should be on the table. In fact, in an attempt to 

foster better communication, transparency, and uniformity, AlA has recently unveiled a 

proposal to formalize state insurance regulator involvement in future negotiations by creating a 

State Insurance Regulator Advisory Board that would coordinate with FlO. By facilitating an ongoing, dedicated line of consultation between the states and FlO, state insurance regulators can 

better inform U.S. negotiators on critical insurance issues in advance of potential future 

international negotiations, as well as provide informed views for the development of other 

insurance-related policy matters at the federal level. 

In response to the question of whether the Covered Agreement could create any unintended 

consequences for consumers, policyholders, or segments of the insurance industry, AlA does 

not believe that this is the case. To the extent that the Agreement follows (or, in some cases, 

builds upon) strong conditions in the NAIC model, the process of statutory collateral reduction 

has been anticipated and is underway already. Moreover, the increased levels of capital and the 

greater regulatory certainty of global reinsurance markets should create more competition 

among reinsurers and positive market effects, which could help offset any potential adverse 

effects for small insurers. 

In the area of group supervision - and, more specifically, group capital - the Covered 

Agreement reinforces state regulation without importing inconsistent Solvency II measures and 

leverages ongoing initiatives launched by the NAIC. Equally important, the Agreement can be 

used as evidence that significant insurance markets can resolve international prudential issues 

without perpetuating unfair regulatory discrimination or forcing the adoption of rigid and 

unworkable standards. For example, in the debate surrounding the International Association of 

Insurance Supervisors' (IAIS) development of a global insurance group capital standard (ICS), 

AlA has repeatedly stated that the ICS should be constructed in a manner that respects local 

regulatory regimes, including the U.S. state-based RBC system. More than 2 years ago, we 

respectfully suggested that the IAIS allow flexibility to consider and incorporate an aggregation 

approach that is an early version of the inventory method being discussed by the NAIC and the 

building blocks approach proposed by the U.S. Federal Reserve Board. At the time, our 

suggestion was met with deafening silence, as the ICS process moved forward on a technical 

path. Perhaps the Covered Agreement will be a model for civil discussion on, and resolution of, 

this and other global supervisory initiatives. 

In conclusion, the completion of the Covered Agreement is a success for U.S. insurers and the 

U.S. regulatory system. It is also a crucial step forward in addressing the modern issues that 

face global insurance markets. With support, its benefits for insurers and policyholders can 

continue to grow. Without support, those benefits will be threatened, and we will return to a 

climate of mutual distrust. 

5 
71 


27201.032

February 15, 2017 

The Honorable Sean Duffy 

Chair, House Financial Services Committee, Subcommittee on 

Housing and Insurance 

2330 Rayburn House Office Building 

Washington, DC 20515 

Dear Mr. Duffy: 

Suite 300W 

1501 E. Woodfield Road 

Schaumburg, IL 60173-5422 

Phone: 847.969.2900 

Fax: 847.969.2752 

www.aaic.com 

I understand that on Thursday, February 16, 2017, you will hold a subcommittee hearing on 

"Assessing the U.S. - EU Covered Agreement," pertaining to a Bilateral Agreement between the 

European Union and the United States of America on Prudential Measures Regarding Insurance 

and Reinsurance ("Covered Agreement"). On behalf of American Agricultural Insurance 

Company ("AAIC"), I wish to voice strong support for the Covered Agreement. 

AAIC is an Indiana domiciled company that was incorporated on May 18, 1948. With over a billion 

dollars in invested assets, AAIC's principal business is reinsurance. The company has over a 

hundred employees located in two locations: Schaumburg, Illinois, and Columbus, Ohio. Since 

1999, AA!C has followed a strategic plan to grow and diversify its reinsurance business by serving 

as an assuming reinsurer in certain international markets. In turn, AAIC participates in 

reinsurance transactions throughout the world with 26.5% of its international assumed 

reinsurance business conducted with insurance companies located in countries in the European 

Union. 

Regulatory changes, including the European Union's adoption of Solvency II, have placed AAIC at 

a competitive disadvantage in its attempts to gain (or even, at times, maintain) market share in 

European Union countries. For example, BaFin (the insurance regulator in Germany) has made 

it clear that AAIC (and other similarly situated companies) cannot reinsure German companies 

unless it establishes a physical branch in Germany. This type of regulation inhibits growth and 

can be prohibitively expensive. Similarly, the Belgium, Netherlands and Polish insurance 

regulators recently placed restrictions on non-EU companies seeking to reinsure companies in 

their respective countries. AAIC took steps to maintain long standing business relationships with 

companies in the European Union, but such steps were costly and do not promote the 

development of long-standing relationships based upon years of information sharing and joint 

development of risk transfer solutions. In fact, AAIC recently lost business with eight European 

Union based insurance companies, and I fear that it will be very hard to recapture (or replace) 
72 


27201.033

that business unless the regulatory dynamic is altered to level the playing field. In the end, like 

so many businesses, the business of reinsurance is built on trust and long-term relationships, and 

a failure to address the regulatory challenges facing AAIC and other similar situated U.S. based 

companies would be a mistake. 

The Covered Agreement is an effective and immediate answer for AAIC and other U.S. based 

reinsurance companies by: (1) allowing AAIC an immediate opportunity to repair and rebuild 

damaged relationships in the European Union; (2) providing AAIC a path to equal footing in the 

international reinsurance marketplace unencumbered by challenging regulatory burdens not 

faced by its competitors; and (3) facilitating the transfer of insurance and reinsurance risk 

through a system that benefits companies and consumers around the globe. 

I urge your subcommittee to allow the Covered Agreement to remain in effect for the benefit of 

AAIC, its employees and similarly situated U.S. reinsurance companies. 

Sincerely, 

AMERICAN AGRICULTURAl INSURANCE COMPANY 

d

\ v--e_:-;{ J ... !Lw-- 1 c..::qvvc_~ 

t S. Katz 

Executive Vice President and Chief Executive Officer 
73 


27201.034

Hearing Statement of the Honorable Dirk Kempthorne 

President and Chief Executive Officer 

The American Council of Life Insurers 

Before the 

U.S. House of Representatives Committee on Financial Services 

Subcommittee on Housing and Insurance 

"Assessing the U.S.-EU Covered Agreement" 

February 16, 2017 

On behalf of the American Council of Life Insurers (ACLI), I am pleased to submit this 

statement for the hearing record in support of the U.S.-EU covered agreement. We thank 

Chairman Sean P. Duffy (R-WI) and Ranking Member Emanuel Cleaver (D-MO) for holding 

this important hearing. ACLI supports the covered agreement because it strengthens U.S. 

competitiveness. In the negotiation of the covered agreement, we supported participation of 

state insurance regulators. We look forward to their active involvement in its 

implementation and administration. 

The ACLI is a Washington, D.C.-based trade association with approximately 290 member 

companies operating in the United States and abroad. ACLI 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. ACLI members offer life insurance, annuities, retirement plans, long-term care and 

disability income insurance, and reinsurance, representing 94 percent of industry assets, 93 

percent of life insurance premiums, and 97 percent of annuity considerations in the United 

States. 

ACLI Supports the Covered Agreement. 

The covered agreement will make U.S.-based insurers and reinsurers more competitive. It 

respects our state-based system of insurance regulation. It facilitates and encourages 

coordination and cooperation between U.S. insurance regulators and EU insurance 

supervisors, which reduces regulatory burdens for the insurance industry on both sides of 

the Atlantic. It maintains protections for U.S. insurers that buy reinsurance from EU-based 

reinsurers. It preserves the sovereignty of our U.S. regulators to impose corrective measures 

on an EU-based reinsurer if it fails to respect any judgment. It also preserves U.S. 

American Council of Life Insurers 

101 Constitution Avenue, NW, Washington, DC 20001·2133 

www.acfi.com 
74 


27201.035

The Honorable Dirk Kempthorne 

Statement for the Record 

Hearing Entitled "Assessing the U.S.-EU Covered Agreement~ 

February 16,2017 

regulators' authority to impose corrective measures on any EU-based insurer if its financial 

condition threatens policyholder protection or financial stability. 

The Covered Agreement Makes U.S.-Based Insurers and Reinsurers More Competitive, Now. 

The covered agreement was negotiated to provide significant immediate benefits to U.S.-

based insurers and reinsurers. With this agreement, EU supervisors will not require U.S.-

based insurers to be subject to global group reporting, governance, or capital requirements. 

That represents significant savings to U.S.-based insurers doing business in EU member 

states. 

U.S.-based reinsurers also benefit immediately because the EU will allow them to sell 

reinsurance cross-border now, with this agreement, without requiring a local presence. It 

has also agreed to change its laws within 24 months to permit U.S.-based reinsurers to sell 

reinsurance cross-border. The agreement says that if the EU fails to change its laws within 

that time, then the United States can impose global group capital requirements on EU 

insurers doing business in the United States. That pledge by the EU is very valuable to U.S.-

based reinsurers doing business in any EU member country. 

U.S.-based insurers and reinsurers also benefit from the predictability that the covered 

agreement gives to those doing business in EU member states. Before the agreement, each 

EU member state could impose its own requirements on U.S.-based insurers doing business 

in that country. That lack of predictability and certainty caused much concern and expense 

since Solvency II came into effect January 1, 2016. ACLI members will benefit from the 

predictability and certainty that the covered agreement brings to EU member states' 

implementation of Solvency II. That predictability and certainty will promote their 

competitiveness. 

The Agreement Respects Current State-Based Insurance Regulation. 

The covered agreement specifically states its respect for our system of state-based 

insurance regulation. It also demonstrates that respect by: 

Deferring to the current state-based method of group supervision and policyholder 

protection; 

Recognizing the states' existing authorities to implement remedial and corrective 

measures; and 

Promoting the uniform application of the NAIC Credit for Reinsurance Model Law and 

Regulation. 

Both EU and U.S. negotiators have affirmed that the agreement was not intended to and 

does not require any change to the current U.S. system of insurance group supervision. 

Page2of4 
75 


27201.036

The Honorable Dirk Kempthorne 

Statement for the Record 

Hearing Entitled "Assessing the U.S.-EU Covered Agreement" 

February 16, 2017 

This is a critical point. The EU has accepted the current U.S. system of indirect group 

supervision. 

The Agreement Provides Reinsurance Collateral Parity. 

U.S. insurance regulators have worked diligently for many years to reduce collateral required 

of reinsurers based in other countries and doing business in the United States. In 2011, thE 

NAIC unanimously adopted a model law and accompanying regulation that allowed collatera 

to be reduced to zero (for very solvent reinsurers from well regulated countries) from the 

100% level that had historically been required of all reinsurers. Thirty-five states have 

adopted the model law; twenty-five states have adopted the regulation. 

Some EU member states have nonetheless maintained collateral requirements for U.S.-

based 'foreign' reinsurers doing business in that country. The covered agreement assures 

that U.S. reduction in collateral is not unilateral-requiring that all EU member states reduce 

collateral to zero on the same timetable for very solvent U.S.-based reinsurers. This will make 

U.S.-based reinsurers more competitive. 

The Agreement Preserves Protections for U.S. Insurers and Policyholders. 

The NAIC model law and regulation on credit for reinsurance contain many protections for 

U.S. insurers and policyholders. The covered agreement maintains these protections, 

including state regulators' authority to require any reinsurer to submit to its authority, report 

on its financial condition and its payment practices, pay any final judgements, and post 

collateral retroactively. The agreement does not compromise state insurance regulators' 

authority to protect U.S. insurers and U.S. policyholders. 

Any Preemption Is Remote and May Not Be Necessary. 

ACLI supports the U.S. system of state-based insurance regulation. ACLI supports the DoddFrank Act's restrictions on the authority of the Federal Insurance Office to act generally as a 

regulator. ACLI supports the Act's strict limitations on preemption and its cautious and 

deliberative approach to any discussion of preemption. These Dodd-Frank Act provisions 

preserve the primacy of our national system of state-based insurance regulation. 

There is no question of any preemption with respect to the covered agreement's text on 

group supervision or on the supervisory exchange of confidential information. The EU has 

accepted the U.S. approach to group supervision, and U.S. regulators and EU supervisors 

agree on how to exchange non-public supervisory information. 

The covered agreement does raise the possibility of preemption in its text on reinsurance 

collateral. We believe that possibility is quite limited, if not remote. The NAIC has 

established its model law and regulation on credit for reinsurance as an accreditation 

Page 3of4 
76 


27201.037

The Honorable Dirk Kempthorne 

Statement for the Record 

Hearing Entitled "Assessing the U.S.-EU Covered AgreementH 

February 16,2017 

standard as of January 2019, meaning that state regulation is well-positioned to implement 

any revisions. 

The Dodd-Frank Act has substantial protections against any preemption. No preemption is 

allowed unless the state requirement treats non-U.S. insurers less favorably than U.S. 

insurers licensed in that state. The new requirement must provide a substantially equivalent 

level of protection for consumers. The Act also has substantial process protections. The 

federal government must consult with the state and the public and consider their input before 

any preemption. The federal government must also notify the committees of jurisdiction in 

Congress upon any preemption. Finally, the Act allows de novo judicial review 

of any preemption. 

********* 

ACLI believes that the benefits of the covered agreement to the competitiveness of the U.S. 

insurance industry and to state regulation are immediate and substantial. We urge 

Members of Congress to support it. 

Again, ACLI appreciates the opportunity to offer this statement in support of the U.S.-EU 

covered agreement. 

Sincerely, 

GOVERNOR DIRK KEMPTHORNE 

Page 4of4 
77 


27201.038

CHUBB~ 

Chubb Global Government Affairs 0 +215.640.2098 

436 Walnut Street, WA04P patricia.henry@chubb.com 

Philadelphia, PA 19106 

February 15, 2017 

The Honorable Sean P. Duffy 

Chairman 

U.S.A. 

Subcommittee on Housing and Insurance 

Financial Services Committee 

U.S. House ofRepreseutatives 

Washington, DC 20515 

The Honorable Emmanuel Cleaver 

Ranking Member 

Subcommittee on Housing and Insurance 

Financial Services Committee 

U.S. House of Representatives 

Washington, DC 20515 

Dear Chairman Duffy and Ranking Member Cleaver: 

In anticipation of the February 16, 2017 Subcommittee hearing entitled "Assessing 

the U.S.-EU Covered Agreement," Chubb would like to submit this letter for the 

record. 

Chubb is the world's largest publicly traded property and casualty insurer. We 

employee over 16,500 people in the United States. The U.S. accounts for over 6o% of 

Chubb's premium written, while Europe accounts for an additional14%. We believe a 

healthy, mutually beneficial relationship between the U.S. and EU is in our national 

interest and is clearly in our company's interest. Together, the U.S. and EU account 

for nearly 70% of total global insurance premiums written. Allowing for a mutually 

beneficial insurance market relationship between the U.S. and EU benefits 

consumers by providing greater product choice and affordability. 

Chubb is a strong supporter of the U.S. state-based insurance regulatory system. It is 

a system that has proven to be effective for over a century. We believe the Covered 

Agreement is a tool that helps preserve this system. The Agreement affirms the U.S. 

system of insurance regulation, including the role of state insurance regulators as the 

primary supervisors of the business of insurance. 

Solvency II, the EU's regulatory system which went into effect last January, has 

created barriers to U.S. companies operating in Europe. The Covered Agreement 

helps alleviate those problems. As an example, our European operations are conducted through our United Kingdom based subsidiary. Our global group 

supervisor is the state of Pennsylvania. However, we were informed by the U.K. 

Prudential Regulatory Authority (PRA) that they would apply Solvency II prudential 

measures to our global operations1 including group capital requirements, governance 

and reporting since we were regulated by a "non-equivalent" authority. While the 

PRA instituted a waiver process, it is still duplicative, burdensome, costly and 

temporary. Our waiver expires in December 2018, at which point we would need to go 

through the waiver process again. Higher costs and capital requirements associated 

with Solvency II would dampen our ability to offer products to our customers around 

the world. 

Various EU Member States have also demanded that U.S. reinsurers establish a local 

presence in their countries given that the U.S. is "non-equivalent." These actions have 

adversely impacted U.S. reinsurers operating in Europe. We believe inhibiting the 

availability of reinsurance is detrimental to Europe and the U.S. given the importance 

of spreading risk globally. 
78 


27201.039

The Covered Agreement has addressed these concerns in an effective manner. Instead of kowtowing to 

the European system of regulation, the Covered Agreement affirms our state-based system and makes it 

more difficult for the EU to globally proselytize about Solvency II as the only appropriate regulatory 

system. 

On group supervision, the Covered Agreement limits the worldwide application of Solvency II on U.S. 

insurers operating in Europe. The group supervision provisions only apply to U.S. insurers operating in 

Europe. This allows for Pennsylvania to remain as our sole global group supervisor. 

The Covered Agreement eliminates collateral and local presence requirements for U.S. insurers 

operating in the EU market and provides reciprocal access to EU insurers in the U.S. This builds on the 

reinsurance collateral reform that state regulators initiated in 2011. The agreement on reinsurance is 

beneficial bilaterally, but globally as well. By affirming that both the U.S. and Europe judge reinsurers 

by their merits and not by their geography, the Covered Agreement sends a strong signal supporting 

open trade in a sector that is premised on global risk diversification. U.S. (re)insurers are facing 

increasing regulations in many developing markets aimed at protecting local (re)insurcrs to the 

detriment of U.S. finns. 

No agreement is perfect. Given our state-based system of regulation, we would have supported a greater 

role for state regulators in the negotiating process and hope that state regulators will have a significant 

role in the Joint Committee established through the Covered Agreement. 

Without the Covered Agreement, the irritants noted above would remain. This would likely lead to a 

further deterioration in U.S.-EU relations, and increased impediments to market access, directly hurting 

consumers. The Agreement entrusts both parties to take steps over a period of years. This will require 

monitoring by Congress, regulators and the insurance sector. We look forward to supporting the 

mutually beneficial implementation of the agreement. 

Sincerely, 

Patricia A. Henry 

Global Government Affairs Officer 
79 


27201.040

VIEWS OF THE CiNCINNATI INSURANCE COMPANIES ON COVERED AGREEMENTS 

Statement for the Record Prepared for the House Financial Services Housing & Insurance Subcommittee 

Hearing on /(Assessing the U.S.-EU Covered Agreement" 

[February 16, 2017] 

THE U.S. SHOULD RENEGOTIATE THE PENDING COVERED AGREEMENT. The pending covered agreement should 

be pulled back and renegotiated since the process under which it was negotiated failed on many levels and 

resulted in an agreement with many procedural and substantive flaws, the terms of which could greatly damage 

the primacy of our state insurance regulatory system. 

LACK OF TRANSPARENCY IN THE PROCESS. There was no transparency in the negotiation process. During the 

negotiation process there were no meaningful stakeholder process or updates for the public on the substance of 

what was being negotiated, and the text of the agreement was hidden from the public until it was filed with 

Congress on January 13, 2017. 

STATE REGULATORS BARRED FROM THE NEGOTIATING TABLE. The law governing the covered agreement 

negotiations prohibited any meaningful participation by state regulators. State regulators were allowed to 

attend the negotiating sessions but were not permitted to directly or actively negotiate and were forced to sign 

nondisclosure agreements preventing them from revealing what they heard in those sessions. Had state 

regulators had real negotiating power, the outcome of the negotiation would have almost certainly been 

different and the terms of the covered agreement better. Instead, state regulators were put in the terrible 

position of being forced to watch on the sidelines as the Administration and a foreign power reshaped the 

landscape of state insurance regulation on reissuance collateral and group capital requirements. 

THERE WAS NO NEED TO ADDRESS REINSURANCE COLLATERAL IN THE COVERED AGREEMENT. Had state 

regulators been allowed a meaningful role in the negotiations of the covered agreement, they would have most 

certainly argued against including the "zero reinsurance collateral" preemption provision in the covered 

agreement since the U.S. already has a state-regulated system that allows EU reinsurers to post zero collateral in 

the U.S. if they achieve the "Secure-1" financial strength rating under the NAIC's "sliding scale" reinsurance 

collateral model law. The NAIC model is well on its way to being adopted in all 50 states; 35 states have already 

enacted the model law and the pace for adoption by the rest of the states will now quicken since the NAIC has 

made enactment of the model law an accreditation requirement' 

THE NAIC'S "SLIDING SCALE" COLLATERAL LAW IS BETTER FOR CONSUMERS. The NAIC's "sliding scale" 

reinsurance collateral law is better for consumers than the provision included in the covered agreement since 

the NAIC model provides six different financial strength rating categories for EU reinsurers; the reinsurance 

collateral provision in the covered agreement only utilizes one financial strength rating for EU reinsurers. Under 

the NAIC sliding scale, the better the financial strength rating of the EU reinsurer, the lower the collateral 

requirement: 

Secu re-1 (0% Collateral) 

Secure-2 (10% Collateral) 

Secure-3 (20% Collateral) 

Secure-4 (50% Collateral) 

Secure-S (75% Collateral) 

Vulnerable-6 (100% Collateral) 

This provides a better mechanism for U.S. insurers to judge the solvency and claims paying ability of EU 

reinsurers before they decide whether to do business with them, which ultimately protects consumers and 

policyholders who want assurance that payment of their claims will not be impacted by EU reinsurers with weak 

1 To put the issues relating to reinsurance collateral in context, it should be noted that the states have long required EU reinsurers to post collateral for 

their U.S. obligations given differences in EU accounting systems, differences in the rigor of insurance regulation in the EU, and difficulty with enforcement 

of judgments by U.S. primary insurers against EU reinsurers in their home jurisdictions, a !I of which make it challenging for state regulators to rate the 

ability and/or wl!lingness of EU reinsurers to pay their U.S, obligations. 
80 


27201.041

financial strength ratings. The NAIC sliding scale model law also protects the U.S. guaranty fund system, which 

relies upon U.S. insurers to do business with reinsurers with strong financial strength ratings who will honor 

their U.S. obligations after a ceding company becomes insolvent. 

PREEMPTIVE POWER IS UNNECESSARY TO ACHIEVE MUTUAL RECOGNITION. The covered agreement creates a 

process for state reinsurance collateral laws to be preempted if they are not revised to comply with the terms of 

the covered agreement. Allowing a covered agreement to preempt state laws puts the power of dictating U.S. 

regulatory policy in the hands of non-regulatory federal bodies and foreign governments. The U.S. should 

continue to pursue mutual recognition agreements with foreign bodies which recognize the robustness of our 

state regulatory system and put U.S. companies on a level playing field, but they should not overwrite state laws 

or otherwise sacrifice state insurance regulation to achieve those objectives. As such, covered agreements 

should have no preemptive power and should be limited to securing mutual recognition of the U.S. system 

under the EU's Solvency II regulatory regime. 

OTHER SUBSTANTIVE FLAWS IN THE COVERED AGREEMENT. The covered agreement has three additional 

substantive flaws that might have been avoided if state regulators had a voice in the process and a seat at the 

negotiating table: 

The covered agreement fails to grant the U.S. regulatory system full equivalency under the EU's 

Solvency II regulatory regime. As a result, U.S. domiciled insurers will not be permitted to operate in the 

EU on the same regulatory terms as insurers domiciled in the EU. 

The covered agreement requires the states to enact a group capital requirement, contrary to the desires 

of the NAIC (the NAIC is in the process of developing a group capital calculation which they do not want 

to become to become a capital requirement). 

The covered agreement creates a "Joint Committee" with considerable authority to implement the 

covered agreement in the U.S., but its members will not include anyone representing state insurance 

regulatory authorities. 

NO MEANINGFUL CHECK & BALANCE BY CONGRESS. The Jaw which governs the covered agreement negotiation 

process is also flawed by the absence of any meaningful check and balance by Congress. Under the current 

process, the Administration can unilaterally preempt state insurance laws through a covered agreement. The 

only Congressional check on this power is a 90 day layover requirement (a covered agreement may not be 

implemented until90 days after it is filed with Congress). In contrast, the EU requires two legislative approvals 

before implementation. Congress needs to have check and balance power over covered agreements which is as 

meaningful as the EU's check and balance power over them. 

CONCLUSION: RENEGOTIATE THE FLAWED COVERED AGREEMENT. The current law under which covered 

agreements are negotiated needs to be reformed by Congress to address the deficiencies identified above. Once 

that occurs, the Administration should return to the negotiating table with state insurance regulators, and, with 

the benefit of an open and transparent process and meaningful checks and balances, seek a covered agreement 

which grants mutual recognition and Solvency II equivalence to U.S. insurers doing business in the EU. 

For Further ln(ormotion Pleose Contoct: 

Scott A. Gilliam I Vice President I Government Relations I The Cincinnati Insurance Company 

6200 S. Gilmore Road, Fairfield, OH 45014 

Work: 513.870.2811 I Cell: 513.607.5717 I Fax: 513-881-8988 

Email: scott_gilliam@cinfin.com 
81 


27201.042

JOSEPH P. GUNSET 

Genera! Counsel 

February 24, 2017 

The Honorable Sean Duffy 

Chairman 

Subcommittee on Housing & Insurance 

Committee on Financial Services 

U.S. House of Representatives 

2129 Rayburn House Office Building 

Washington, DC 20515 

LLOYD'S 

The Honorable Emanuel Cleaver 

Ranking Member 

Subcommittee on Housing & Insurance 

Committee on Financial Services 

U.S. House of Representatives 

2129 Rayburn House Office Building 

Washington, DC 20515 

Dear Chairman Duffy and Ranking Member Cleaver: 

During the course of your Subcommittee's hearing on the U.S.-EU Covered Agreement on February 

16th, a statement was made that may have left the impression that Lloyd's of London had failed to pay 

a claim due to bankruptcy. We wish to correct for the hearing record any misimpressions that may 

have arisen from that statement. 

In fact, Lloyd's has never failed to pay a valid claim, and certainly has never gone "bankrupt" nor used 

financial condition to avoid any claims. Lloyd's has a long and deep history of insuring and reinsuring 

the American economy, writing both specialist and catastrophic risks. Lloyd's reputation in the United 

States was cemented in the aftermath of the 1906 San Francisco earthquake, when Lloyd's leading 

underwriter Cuthbert Heath on behalf of the market famously instructed their San Francisco agent to 

"pay all of our policyholders in full, irrespective of the terms of their policies". 

Since the first Lloyd's American Trust Fund was voluntarily established by Lloyd's in 1939 on the eve 

of World War II to reassure U.S. clients, Lloyd's has maintained trust funds in the United States 

available to respond to any valid claims judgment against Lloyd's Underwriters. Today these trust 

funds stand at more than $12.3 billion. 

More recent examples of Lloyd's steadfast commitment to the U.S. include the $7.8 billion in insured 

losses that the Lloyd's market paid arising out of the September 11th terrorist attacks, and $10.1 

billion in insured losses Lloyd's paid arising from the 2005 hurricane season (Hurricanes Katrina, Rita, 

and Wilma). This is a relationship Lloyd's is proud of and continues to build upon. 

So to reiterate, Lloyd's has always paid all valid claims in the United States, and has certainly never 

failed to honor a claim due to the financial condition of any participant in the Lloyd's market. 

We are grateful for the opportunity to correct the record. 

Respectfully submitted, 

Lloyd's America, Inc. The Museum Office Building 25 West 53'' Street 14'" Floor New York NY 10019 www.lloyds.com/US 

Telephone +1 212 382 4083 Fax +1 212 382 4070 Email: joseph.gunset@lloyds.com 

Lloyd's is authorised under the Financial Services and Markets Act 2000 
82 


27201.043

0DYSSEYRE 

Peter H. Lovell 

General Counsel 

February 15 2017 

The Honorable Sean Duffy 

United States House of Representatives 

1208 Longworth House Office Building 

Washington, D.C. 20515 

Dear Chairman Duffy: 

Odyssey Re Holdings Corp. I 300 First Stamford Place 

1 

Stamford, CT 06902 

I T 203 977.8000 

1 r 2o3 965.7960 

A Fairfax Company l www.odysseyre.com 

I write to you on behalf of OdysseyRe Group, which consists of insurers based in the United States 

and United Kingdom under the Hudson and Newline banners, as well as Odyssey Reinsurance 

Company ("OdysseyRe"), a US-based reinsurer operating in over 100 countries around the world, 

including the European Union. The OdysseyRe Group has more than $10 billion of assets and over 

950 employees worldwide, 671 of whom are located in the US. 

I want to express our Group's full support for the "Covered Agreement" that was recently 

concluded by representatives of the US and the EU, which currently lays with four congressional 

committees in accordance with the Dodd-Frank Act. As you know, this agreement addresses (and 

provides relief) in three areas of great concern to US-based reinsurers doing business in the EU, 

which relate to (1) local presence requirements, (2) collateral requirements, and (3) the imposition 

of group supervision beyond local EU operations, to upstream portions of a US insurance group. 

OdysseyRe has recently experienced first-hand the negative consequences of local presence and 

collateral requirements in the EU, and will benefit greatly from the ability to freely conduct business 

throughout the EU without having to first establish a branch office in every EU country, and without 

having collateral requirements imposed on us that are both cumbersome and costly to satisfy. We 

also stand to benefit from the group supervision relief provided by the Covered Agreement, which 

would protect the OdysseyRe Group from the imposition of supervision by EU regulators beyond 

our EU operations, as currently required by the EU system of regulation known as Solvency II. 

In fact, in recognition of the US's entry into the Covered Agreement in mid-January, two EU 

countries which had introduced local presence and collateral requirements during 2016 have 

agreed to immediately forbear from enforcing these requirements against US reinsurers like 

OdysseyRe, allowing OdysseyRe to once again freely conduct reinsurance business in these two EU 

countries, which account for more than twenty million dollars of premium income for OdysseyRe. 

The Covered Agreement has therefore already brought immediate and valuable relief for 

OdysseyRe. 
83 


27201.044

The commitment by these countries to forbear, however, is expressly contingent on the Covered 

Agreement remaining on course and becoming effective. OdysseyRe would immediately suffer 

catastrophic dislocation in respect of its business in these two countries should the Covered 

Agreement fail to come into effect, and suffer even greater consequences in the future throughout 

the rest of the EU. 

We therefore respectfully urge your support of the Covered Agreement, lest we lose this immediate 

and tangible benefit, and the larger future benefits the Covered Agreement provides to US 

reinsurers like OdysseyRe. 

Respectfully submitted, 

v+/1@ 

Peter H. Lovell 

General Counsel 

2 
84 


27201.045

R\A 

REI!\SURA'ICE ASSOCIATION OF AMERICA 

February 15,2017 

The Honorable Sean Duffy 

Chair, Subcommittee on Housing and Insurance 

House Financial Services Committee 

United States House of Representatives 

Washington, D.C. 20515 

Re: RAA Strong Support for U.S.-EU Covered Agreement 

Dear Chainnan Duffy: 

The Reinsurance Association of America (RAA) is tbe leading trade association of property and 

casualty reinsurers that do business in the United States. RAA membership is diverse, including 

reinsurance underwriters and intermediaries that are based in the U.S. and do business around the 

globe as well as non-U.S. companies that choose to either be licensed in the U.S. or to conduct 

business on a cross-border basis. For all of these companies, diversification of their business across 

the globe and across various lines of business is critical. 

This letter is respectfully submitted in strong support of the Covered Agreement recently 

concluded between the U.S. and EU. First, the strength of the state-based insurance regulatory 

system is officially acknowledged in an international agreement for the first time. The Preamble 

of the Agreement explicitly provides that the Parties "respect[] each Party's system for insurance 

and reinsurance supervision and regulation." This formal acknowledgement is useful for many 

reasons, including as support for the United States' argument that the International Capital 

Standard being developed by the IAIS should accommodate the U.S. regulatory approach to 

capital. Second, the benefits of the Covered Agreement to U.S. based companies doing business 

in the European Union are clear and substantial. The Covered Agreement provides regulatory 

certainty and resolves recent market access issues for U.S. companies doing business in Europe. 

Per the terms of the Agreement, U.S. companies have already received access to previously closed 

markets. Third, the Agreement forbids the imposition of collateral against U.S. companies in 

Europe and prohibits the imposition of the European Union's group supervision rules beyond local 

EU operations to upstream entities of a U.S. Group. 

If the Covered Agreement is not implemented, there is no "Plan B." The NAIC initially advised 

the EU that it wished to pursue equivalence only to change course to not seek equivalence when it 

became clear that the U.S. would have to make substantive changes to its regulatory system. And 

now that the U.S. has negotiated a deal that in several instances is better than equivalence and 

which does not have the obligations to make regulatory changes that would be required under a 

Solvency II equivalence determination, the NAIC and others seek to derail the Agreement. And 

1 
85 


27201.046

their only suggestion is to "go back to the drawing board." Seeking to renegotiate this Agreement 

is potentially very damaging and counterproductive to U.S. interests. 

It is notable that the U.S. is receiving these substantial benefits in exchange for something the 

NAIC unanimously voted do in 2011 (and received nothing from the EU in exchange for doing)·-

reduce collateral across all the states, in most cases to l 0 or 20%. There is no need to relitigate 

that issue now. 

Several parties attempt to characterize large passages of the Agreement as ambiguous, warranting 

renegotiation or some undefined official clarification. The Agreement provides for a Joint 

Committee "for consultation and to exchange information on the administration of the Agreement 

and its proper implementation." This is the appropriate process to seek clarifications for 

implementing the Agreement, not reopening the negotiations. 

We urge Congress to see past certain parties' philosophical dislike for any federal role in 

negotiating an international agreement involving (re)insurance regulation as well as the possibility 

of limited preemption, and to focus on the real benefits achieved in the Agreement. We ask that 

Congress support the Administration signing the Covered Agreement thereby enabling U.S. 

companies to receive the substantial benefits it affords and which they would not otherwise receive. 

2 

;b-

~anklin W. Nutter 

President 
86 


27201.047

February 17,2017 

The Honorable Sean Duffy 

United States House of Representatives 

1208 Longworth House Office Building 

Washington, DC 20515 

Dear Chairman Duffy: 

Transatlantic Reinsurance Company {TransRe} appreciated the opportunity to participate in your Roundtabte 

discussion on the US/EU Covered Agreement. We found the opportunity to engage with you and your staff as 

well as others in our industry an invaluable experience. We support the current Covered Agreement and 

encourage you and you colleagues on the Financial Services Committee and the Subcommittee on Housing and 

!nsurance to consider carefu!ly the positive benefits the Covered Agreement provides tor US Reinsurers, their 

employees and their reinsureds. We also support a continuing Federal role as respects international insurance 

agreements, The States, while effective in matters relating to insurer supervision, insurer market conduct and 

policyholder protection, are constitutionally limited as respects international matters, 

While there are diverging viewpoints on the need for a Covered Agreement there are some things upon we can 

a!! agree: 

The emergence of Solvency !! was a decade long process and the insurance industry, the NAlC and the States 

had adequate notice and opportunity to engage the EU on the equivalence issue, A review of press clippings 

quoting N/\!C Staff and State Supervisors will find them to be peppered with references to the need for US 

Supervisors to address issues of equivalence as far back as 2008. The Solvency Modernization initiatives 

undertaken by the states were a direct response to Solven(y Hand the lAIS Insurance Core Principles. 

Coincidentally, 2008, as a consequence of discussions between TransRe and its EU Supervisors, Tran;;Re 

actively sought out staff at the NAIC to encourage them to actively engage with the EU to advocate for US 

insurers and reinsurers operating in Europe. This request for advocacy was set against the backdrop of the 

NA!C and the States working furiously to open the US market to EU compardes by reducing their reinsurance 

co!lateral requirements. White the Model Act for Credit for Reinsurance wove its way through committees at 

the NAtC it seemed to TransRe that the States were steadfastly ignoring our pleas that the NAlC and States get 

sornething from the EU in return. 

Accordlngty, you can understand our bewilderment, now that the Covered Agreement has been made public, 

that the NAIC and the States that are now critical oft he Covered Agreement for falling to achieve "Equivalence" 

and dismissive of the achieved outcome of "Mutual Recognition:' This criticism seems hollow when one 

considers that: (a) despite nlne years of advance notice the NA!C has arcomplished little if anything of benefit 
87 


27201.048

to US Companies v-Jdting business in the EU while making it significantly easier for EU companies to do business 

in the US, and (b) Senator Ben Ne!son, NA!C CEO, and then President of the NAIC, Commissioner Adam Harnm, 

specifically put the EU on notice that the US regulatory was "not pursuing an equivalence determination" {see 

attached July 2014 NAIC letter). 

TransRe fully supports our effective and proven State-based supervisory system in the United States. However, 

our system, for all its strengths, is limited in its ability to provide the advocacy, support and authority to allow 

US domestic reinsurers to operate on an equal footing in the global marketplace. The current Covered 

Agreement largely accomplishes this with the EU and serves as notice to the emerging and developed markets 

el!;.ewhere that the supervisors of the two largest global reinsurance markets have reached an agreement as to 

the others effectiveness and quality. The Covered Agreement process itself may be improved, and we 

encourage this be done wlthln the confines of the CHOICE Act, but the current Covered Agreement provides 

immediate assistance to US Reinsurers and meets or exceeds the NAIC stated goals for the past nine years. 

!n conclusion, we see the Covered Agreement as an endorsement of the strength and effectiveness of the State~ 

based system and a we !come demonstration of State and Federal support for US Companies that seek to operate 

in the EU. Further we see this as a powerful indicator to supervisors in those developed and emerging markets 

that look to our nation and the EU for guidance. TransRe thanks you for your leadership on this Important 

process and looks forward to working with you on this and the other key lssues fadng this nation. 

Warmest regards, 

Senior Vire President and Deputy General Counsel 

Encl. 
88 


27201.049

National Association of 

Insurance Commissioners 

July ll, 20!4 

Mr. Jonathan Faull 

/:x 111cCENTER 

for INSURANCE 

POLICY 

and RESEARCH 

Director General, Internal Market and Services 

European Commission 

l 049 Brussels 

Belgium 

Dear Mr. Faull; 

Thank you for your letter of June 6"' regarding your views on the "Way Forward Project" and for your assessment 

of the US regulatory system in the context of the Solvency 2 equivalence requirement. 

We agree that the Project has been useful in terms of enhancing mutual understanding of the US and EU 

regulatory systems. As our collective jurisdictions represent nearly two-thirds of the global insurance market, 

shared confidence in our different regulatory approaches is important to reinforce the transatlantic insurance 

market and ensure effective cross border supervision of global firms. 

As you know, U.S. state insumnce regulators are not pursuing an equivalence determination. While it is possible 

to compare our respective statutory authorities on paper, it would be challenging to conduct a comprehensive 

comparison of our two regulatory systems in practice until Solvency 2 is fully operational and the outcomes it 

produces based on actual experience are better understood. 

There are clear structural and legal differences between our two supervisory systems, but we continue to believe 

that the US regulatory system results in outcomes for insurers and policyholders that we hope Solvency 2 will 

achieve once it is fully implemented. This belief is based on real experience during perinds of recession and great 

stress, hard and soli markets, low interest rates. and increasing frequency and severity of catastrophic events. 

Irrespective of those views, any inflexibility in the equivalence process that precludes the Commission from 

reaching a similar conclusion about the efficacy of our system is entirely self-imposed. Equivalence is a function 

of European law subject to the Commission's interpretation. so in lieu of delineating changes to the US 

supervisory system that by all accounts is among the most effective in the world, the Conunission should instead 

reevaluate whether the equivalence mandate deserves to be reconsidered given its potential negative impact on US 

and European finns and policyholders. 

Sincerely, 

Membership of the NAJC lntemationallnsurance Relations Leadership Group 

Senator Ben Nelson 

NAICCEO 

Adam Hamm. Chair 

NAIC President 

North Dakota Insurance Commissioner 
89 


27201.050

July 3, 2014 

Page 2 

Monica J, Lindeen, Vice Chair 

NAIC President-Elect 

Commissioner, Montana Securities and Insurance 

<UttJ.kl\_ -P f.t..J< 

Sharon P. Clark 

NAIC Secretary-Treasurer 

Kentucky Department of Insurance 

cH/J7f-r6 

Joseph G. Murphy 

Commissioner, Massachusetts Division of Insurance 

I$...-_ If_ /{ '#"-

Bruce R. Ramge 

Director, Nebraska Department of Insurance 

Chester McPherson 

Acting Commissioner 

D.C. Department oflnsurance, Securities and Banking 

Benjamin :vi. Lawsky 

Superintendent 

New York State Department of Financial Services 

Julie Mix McPeak 

Commissioner 

Tennessee Department of Commerce and Insurance 

( 

Michael F. Consc'lline 

NAIC Vice President 

Pennsylvania Insurance Department 

L:..,;~ 

Kevin M, McCarty 

Commissioner, Office of Insurance Regulation 

John M. Huff 

Director, Missouri Department of Insurance 

Gordon l. Ito 

Hawaii Insurance Cmmnissioner 

~/!Jjt~ Kansas Insurance Commissioner 

James J. Donelan 

Louisiana Insurance Commissioner 

Thomas B. Leonardi 

Connecticut Insurance Commissioner 
90 


27201.051

TI1e Honorable Denny Heck 

425 Cannon House Office Building 

United States House of Representatives 

Washington, DC 20515 

Dear Congressman Heck: 

On behalf of the Intergovemmental Policy Advisory Committee on Trade (IGP AC), a trade 

advisory committee appointed by the United States Trade Representative (USTR), which 

provides trade policy advice on matters that have a significant relationship to the affairs of state 

and local govemments, I wanted to express ow· concern regarding the covered agreement 

between the European Union (EU) and the United States. 

As one of the IGPAC's main concerns has always been the possibility that state laws could be 

preempted or found inconsistent under trade agreements, it pressed the USTR to brief the 

committee on the negotiations of any covered agreement since the Dodd-Frank bill was 

enacted. After it was reported that the United States and the EU intended to negotiate a covered 

agreement, on multiple occasions in 2015 and 2016, the IGPAC requested that USTR and the 

Treasury Department closely consult with relevant stakeholders and provide regular briefings to 

the IGPAC throughout the negotiations in light ofthe potential for this agreement to impact State 

sovereignty; discriminatory actions by EU member countries; and potential National Treatment 

violations by the EU. Unfortu11ately the Treasury Department and USTR failed to honor this 

promise and provided only one superficial briefing in December 2015 before the first roW1d of the 

negotiations and failed to provide f\!1Y briefings during the ongoing negotiations. With the 

conclusion of the agreement, the TGPAC has still not yet received a briefing on the potential 

impact this agreement may have on State sovereignty and its impact on consumer protection. 

Furthermore, IGPAC Members were advised that state insurance regulators ·would have a 

meaningful role during the negotiations, however only a small group were included as observers 

and were unable to consult with their fellow regulators. legislators or Governor's offices. The 

lack of transparency to the IGPAC and other stakeholders regarding the nature and progress of 

the covered agreement negotiations is extremely concerning. The agreement should have been 

negotiated in collaboration with the States and their relevant experts at the table with frequent 

consultation of the IGPAC. This lack of transparency sets a dangerous precedent for future 

agreements. Consequently, we would urge that the agreement be renegotiated with a more 

transparent process that is fully inclusive of the State insurance regulators to ensure that the 

agreement is in the country's best interests and does not sacrifice key consumer protections. 

Sincerely, 

\ 

fLtvt-c.t~ Robcat Hamilton 

Chairman, IGPAC 
91 


27201.052

SEAN UNITED STATES 

REPRESENTATIVE 

DUFFY 

PROUDLY REPRESENTING WISCONSIN'S 7TH DISTRICT 

Mr. Charles Chamness 

QUESTIONS FOR THE RECORD 

Hearing: "Assessing the U.S.-EU 

Covered Agreement" 

Date: February 16, 2017 

1) Many of your members are purchasers of reinsurance. Are you concerned about the 

zeroing out of reinsurance collateral requirements from a consumer protection standpoint? 

From a cost standpoint, what will the impact of eliminating reinsurance collateral be on 

those who may choose to reach voluntary agreements with reinsurers to post collateral? 

Answer: We are concerned about the lack of collateral in place for our members, especially 

if collateral is not required for reinsurers with poorer credit ratings. The NAIC model 

provides a staggered approach to collateral in the model law that would increase the 

collateral requirements for reinsurers with lower credit ratings. The lack of consideration of 

the credit-worthiness of reinsurers under the covered agreement is a major concern. 

2} A majority of members of the National Association of Mutual Insurance Companies are 

smaller companies that may not have plans to expand their business to international 

markets. Yet, the Association has voiced significant concerns about the authority of the 

covered agreement to allow a potential federal preemption of state regulators. Why is this 

issue of preemption important to NAMIC when the agreement appears to only affect larger 

companies operating in both the U.S. and international markets? How could Congress 

ensure that its oversight role is a firewall to protect state regulatory systems, as outlined in 

the McCarran-Ferguson Act? 

Answer: Simply put, it does not only affect larger companies doing business internationally, 

which is the problem. Those U.S. insurers who do not have international business- which is 

the vast majority of U.S. insurers- are the only ones who do not benefit from this 

agreement, and yet those same companies will lose the collateral they value from European 

reinsurers due to federal preemption. The covered agreement wins some minor points, if 

somewhat ambiguously, for the large international companies and takes reinsurance 

collateral away from the U.S. only companies of all sizes. Additionally and of equal 

importance, it also impacts the U.S.-only companies by insisting the states create a new 

group capital requirement which is in opposition to the legal entity regulation on which the 

U.S. system is based. Simply stated, U.S.- only companies get nothing from this agreement 

but the loss of reinsurance collateral and additional and inappropriate regulation in the 

form of a new group capital standard. 
92 


27201.053

All Witnesses 

3) In the EU, both the European Council and the European Parliament must affirmatively 

approve or reject the covered agreement. In the U.S., Congress doesn't even have the 

power to expedite the rejection of such an agreement much less approve it. As the 

Financial Services Committee considers this agreement, and potential future international 

insurance agreements, should we consider a new and more robust role for Congress? 

Answer: Absolutely, NAMIC agrees that Congress should have a more robust role. The lack 

of a role is especially troubling when this type of trade activity impacts state or federal laws 

without a legislative role. NAMIC has long called for Congress to be more involved in this 

process and at a minimum should have an up-or-down vote on any covered agreement 

reached by the executive branch. 

4) With this covered agreement, FlO has the power to preempt a State insurance measure if 

the Director determines that the measure "results in less favorable treatment of a nonUnited States insurer domiciled in a foreign jurisdiction that is subject to a covered 

agreement than a United States insurer domiciled, licensed, or otherwise admitted in that 

State." Although not explicitly cited in the statute, this is generally understood to be a 

reference to a reinsurance collateral agreement with the EU. If the agreement enters into 

force, do we still need covered agreement authority as outlined in Dodd-Frank? 

Answer: NAMIC does not think that the authority was needed in the first place, and most 

certainly is not needed going forward. 

5) Some have expressed concerns that the Executive Branch could use the authority under 

Dodd-Frank for a covered agreement to achieve an agreement on capital standards with the 

International Association of Insurance Supervisors (IAIS). Do you think that the language in 

Dodd-Frank for covered agreements gives the Executive Branch that authority? 

Answer: The current covered agreement demonstrates exactly how an administration can 

allow a foreign jurisdiction like the EU to try and backdoor new foreign standards into the 

U.S. The EU simply invented regulatory pressure on U.S.-based companies under the guise 

of Solvency II' s equivalency determination, and is now using the covered agreement to 

insist on changes to U.S. law and practice in order to make that pressure disappear. This is 

what the group supervision provision of the covered agreement is about. 

Rep. Sean Duffy (WI-07) 
93 


27201.054

We are also concerned about future activist FlO directors broadly interpreting the language 

in Dodd-Frank to give the FlO and USTR the authority to address other issues. These could 

take the form of new or different capital standards (whether or not in an agreement 

through the IAIS) or governance standards, which could all be considered to be under the 

statutory language of "prudential measures." This would be an abuse of the covered 

agreement authority. We do not believe covered agreements should deal with issues that 

can and are being resolved by the state insurance commissioners or through their 

organization the NAIC. 

Rep. Sean Duffy (WI~07) 
94 


27201.055

Questions for the Record 

Rep. Blaine Luetkemeyer (M0-03) 

"Assessing the U.S.-EU Covered Agreement" 

Committee on Financial Services 

Subcommittee on Housing and Insurance 

February 16,2017 

To Charles Chamness, NAMIC 

I. You have advocated that this Covered Agreement be renegotiated. That will no doubt take 

time. What can be done to immediately assist U.S. based companies on the market access 

issues and the expensive Solvency II compliance costs that would otherwise be addressed by 

this Covered Agreement? 

Response: 

We do not believe that the market access issues and Solvency II compliance costs are 

ultimately addressed by this covered agreement as it does not adequately resolve the question 

of U.S. equivalence or mutual recognition. Therefore another solution is needed. Simply 

signing a t1awed agreement and hoping for the best dmm1 the line should not be the U.S. 

strategy. Solvency II was implemented on January 1. 2016 and yet the EU stayed the 

eniorcement for U.S. companies for over a year as the covered agreement was being 

negotiated. They can simply do that again. Or they could grant the U.S. equivalence and 

remove the problems they invented in the tirst place. Regardless. we do not believe 

reopening negotiations will make the EU walk away from the table when they stand to gain 

$40 billion in reinsurance collateral relief. 
95 


27201.056

Chairman Duffy 

U.S. House of Representatives Financial Services Committee 

Hearing: "Assessing the U.S.- EU Covered Agreement" 

February 16, 2017 

Michael T. McRaith 

Replies to Questions for the Record 

Question Number One 

The Covered Agreement (Agreement) opened the entire EU reinsurance market to U.S. 

reinsurers, spared U.S. industry operating in the EU potentially billions of dollars in 

compliance costs, and embraced the U.S. state regulatory approach to insurance group 

supervision. 

The Agreement applies only to, and provides clarity for, U.S. and EU insurers that 

operate in both jurisdictions. Notably, the benefits are not mutually exclusive in that a positive 

outcome for EU industry stakeholders can also benefit U.S. interests. 

EU insurers and reinsurers insure millions of American families and businesses and employ tens 

of thousands of Americans in states around our country. EU-based holding companies own high 

profile U.S. property and life insurers. EU-headquartered insurers and reinsurers pay billions to 

assist the United States in post-disaster recovery. For example: 

EU insurers and reinsurers paid more than $12.2 billion in claims following 

the terrorist attacks of September 11,2001, an event for which 64% of all 

claims were paid by reinsurers. Lloyd's paid more than 11% of all 9/11 claims. 

Following the devastation of Hurricanes Katrina, Rita and Wilma, more than 

22% of all claims were paid by EU insurers and reinsurers, with Lloyd's paying 

nearly 10% of the totaL 

Of the total insured claims of S 18.715 billion from Superstonn Sandy, $5.3 

billion was paid by EO-headquartered insurers and reinsurers, and 

approximately $2.5 billion was paid by Lloyd's. 

This reply identifies only the legal benefits confciTed upon the United States and its 

stakeholders (consumers and industry), and docs not describe the financial and 

commercial benefits for those stakeholders. 

The Agreement is drafted in language, and provides benefits, that apply equally to the 

United States and the EU. The following list oflegal benefits conferred on the United 

States by the Agreement cites directly to the relevant Article and Paragraph: 
96 


27201.057

a. Preamble: the Preamble ret1ects the understandings and acknowledgements of the United 

States and the EU with respect to the Agreement. While each is an important statement, 

three warrant spccit!c mention: 

"Sharing the goal of protecting insurance and reinsurance policyholders and other 

consumers, while respecting each Party's system for insurance and reinsurance 

supervision and regulation'': 

"Taking into account infon11ation exchanged on each Party's regulatory frameworks 

and after careful consideration of these frameworks"; 

"Acknowledging the need for a group capital requirement or assessment for 

insurers and reinsurers forming part of a group that operates in the territory of both 

Parties, and that a group capital requirement or assessment at the level of the 

worldwide parent undertaking can be based on the approach of the Home Party[.]" 

b. Article 1 - Objectives 

While Article I docs not, in itselt~ confer any legal benefits for U.S. stakeholders, the 

Objectives articulate the goals of the Agreement. While each is important and arc 

addressed in the following substantive A1iiclcs, these goals describe the outcome of 

the Agreement: 

(a) Elimination oflocal presence requirements for U.S. and EU reinsurers 

operating in the other jurisdiction. 

(b) Elimination of collateral requirements for U.S. and EU reinsurers 

operating in the other jurisdiction. 

(c) Prohibit the application of group supervision by an EU regulatory 

authority except to the extent that the U.S. insurer has operations or activities 

occurring in or originating from the EU, including with respect to solvency and 

capital, govcmance and reporting. 

c. Article 2- Definitions 

d. Article 3 ~-Reinsurance 

Article 3 describes the Parties' affirmative commitments with respect to reinsurance. 

2 
97 


27201.058

Paragraph: 

l. and 2. U.S. reinsurers will not be subject to collateral requirements, 

or any requirement of similar impact, when operating in the EU unless 

EU reinsurers arc also subject to those requirements in the EU. This 

prohibition applies both to contractual arrangements and to regulatory 

credit to a ceding insurer for the purchased reinsurance. 

3. U.S. reinsurers will not be subject to local presence requirements 

(i.e. the establishment of a subsidiary, holding company, or other legal 

entity) or any requirement of similar impact, when operating in the EU. 

4(a)- (1). Relief from local presence and collateral obligations for 

an EU reinsurer in the United States is dependent upon the EU 

reinsurer meeting financial condition and market conduct standards. 

The details of these standards, which remove excessive regulation, 

track existing state-based law and regulation. 

5. In addition to the information required by paragraphs 4(a)- (1), 

reinsurers may voluntarily provide information to regulatory authorities. 

6. In the event that an EU reinsurer fails to meet the standards and 

requirements of paragraph 4, then U.S. insurance authorities may re-impose 

collateral requirements on that EU reinsurer. 

7. Subject to applicable law, U.S. ceding insurers can negotiate any 

provision in any reinsurance agreement, including for collateraL 

8. Existing U.S. reinsurance agreements are not affected by the 

Agreement, i.e. the Agreement does not have a retroactive effect. 

Consistent with basic contract law, reinsurance agreements cannot be 

unilaterally amended. An amendment to a reinsurance agreement can 

be limited to the targeted subject matter of the amendment without 

changing the remaining provisions of the agreement. 

If, ior example, a reinsurer changed its name, then the parties to that reinsurance 

agreement could agree to amend the existing reinsurance agreement with respect to the 

name change only, which would not alter the agreement's requirement for collateraL 

These provisions arc drawn from NAIC Model Regulation 786 (Credit 

for Reinsurance). 

9. If the Agreement were tem1inated, then the United States and the 

3 
98 


27201.059

EU can again require the posting of collateral or the establishment of a 

local presence for a reinsurer domiciled in the other jurisdiction. 

c. Article 4 Group Supervision 

This Article describes the mutual affirmation of group supervision practices of the 

United States and the EU, and describes group supervision practices to be adopted 

by both the United States and the EU upon the date of provisional application, (i.e. 

date of signature, as provided in Article 10, Para. 2(a)). 

Article 4 applies only to those U.S. insurers operating in both the United States and 

the EU. 

Article 4 acknowledges that the United States and the EU have different 

approaches and systems with respect to insurance group supervision, and provides 

clarity regarding the interaction of those approaches and systems going forward. 

Paragraph: 

(a) Recognizing the value of supervisory colleges, the Agreement 

clarifies that only U.S. insurance supervisors will supervise U.S. insurers at 

the worldwide group level. In other words, EU supervisors can apply EU 

law and regulation to U.S. insurers only for operations and activities that 

occur in or originate from the EU. This limitation applies to all aspects of 

group supervision, including solvency and capital, govemance, and 

reporting. 

In other words, U.S. insurers arc supervised at the worldwide group level 

as determined by U.S. state insurance regulators. 

(b) Subject to Article 3, U.S. insurers and reinsurers operating in the 

EU arc subject to EU law and regulation only for purposes of operations 

and activities occurring in or originating from the EU. 

(c) U.S. insurers arc required to prepare only a U.S. state-based Own 

Risk Solvency Assessment (ORSA) at the worldwide group level, not both 

a U.S. and an EU ORSA. The summary report of the U.S. ORSA can be 

shared with EU supervisors through the insurer's supervisory college. In 

other words, at the worldwide group level, U.S. insurers will complete an 

ORSA consistent with U.S. state regulatory practices. 

(d) The required elements of the ORSA, as described in this 

paragraph, are drawn from the NAIC Risk Management and Own Risk and 

4 
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Solvency Model Act (#505) and the NAIC ORSA Guidance Manna!. 

(e) If the ORSA of an EU insurer or reinsurers reveals a serious threat 

to U.S. policyholders, then the U.S. insurance regulator may consult with 

the insurer's lead EU supervisor and may impose preventive, corrective or 

responsive measures. 

(f) U.S. insurers operating in the EU report at the worldwide group level 

only to the lead U.S. insurance supervisor unless the infonnation to be 

reported reveals a direct threat to activities or operations occurring in or 

originating from the EU. In other words, at the worldwide group level, U.S. 

insurers report consistent with U.S. state regulatory practices. 

(g) U.S. regulators retain the ability to ask for information about nonU.S. activities that may pose a serious threat to the ability of an EU insurer 

or reinsurer to pay its claims in the United States. 

This language tracks the "windows" of the NATC Model Holding Company 

Act (#440) provisions that allow state insurance regulators to "scrutinize 

group activity and assess its potential impact on the ability of the insurer to 

pay its claims." 

(h) As with all of Article 4, the group capital calculation applies only to 

U.S. insurers that operate in the EU. U.S. insurers and reinsurers 

operating in the EU are relieved of the EU's Solvency II group capital 

reqnirement upon the date of provisional application, i.e. the date of 

signature (Article 10, Para. 2(b)). 

U.S. state insurance regulators who, in reply to international developments, 

have been developing a group capital calculation since 2014, have five 

years from the date of signature (Article 10, Para. 2(a) and 2(e)) to develop 

the group capital calculation for the subset of U.S. insurers operating in the 

EU. For that five(+) year period, and upon completion, U.S. insurers 

operating in the EU arc not thereafter subject to reporting or maintaining 

the Solvency II worldwide group capital requirement. The language is not 

prescriptive in tcnllS of the mechanics or specifics of the group capital 

calculation, but defers to the ongoing work of U.S. state insurance 

regulators. 

The language regarding "authority to impose preventive, corrective, or 

otherwise responsive measures on the basis of the assessment, including 

reqniring, where appropriate, capital measures" is intentionally broad. This 

language accommodates both the U.S. state regulatory approach (i.e. at 

5 
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the entity level) and the EU Solvency II approach (i.e. at the holding 

company level). 

(i) If the EU exercises enhanced group supervision over a U.S. insurer for 

purposes of financial stability, then the United States can terminate the 

Agreement. 

f. A1iiclcs 5 and 6- Exchange ofinformation and Annex 

These Articles encourage continued and enhanced exchange of confidential infonnalion across 

borders and encourage U.S. and EU supervisors to utilize the template attached as an Annex to 

the Agreement. 

g. Article 7 Joint Committee 

Aiiiclc 7 provides for the establishment of a Joint Committee to address questions of the 

Agreement's interpretation and implementation. 

h. Article 8 Entry into force 

The Agreement enters into force seven days after the Parties exchange written notice that internal 

approval processes have been completed. However, timing for the effective date of the 

Agreement provisions is specified in Article 10. 

1. Article 9 Implementation of the Agreement 

Article 9 describes that the EU and the United States shall take all measures to implement and 

provisionally apply the Agreement. 

j. Article l 0-Application of the Agreement 

The Agreement is entirely cross-conditional. Neither the EU nor the United States receive the 

benefits of the Agreement without providing the benefits of the Agreement. For example, if, five 

years from the date of signature, the EU were to reject the U.S. state regulatory approach to 

worldwide group capital for U.S. insurers operating in the EU, then the EU would relinquish the 

beneflts of the Agreement for EU consumers and industry. 

1. The Agreement applies to U.S. insurers operating in the EU on the date of entry into 

force, or the date of signature, whichever is later. 

2. (a) U.S. insurers and reinsurers operating in the EU arc relieved of Solvency II 

worldwide group requirements upon signature of thcAgreement (i.e. the date of 

provisional application). 

6 
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n. 

(b) Provided that the U.S. state insurance regulators comply with Articles 3 and 4, then 

the provisions and benetits of Article 3 and 4 will be received by U.S. consumers, 

insurers, and reinsurers. 

(c) The exercise by the EU of enhanced supervision over a U.S. insurer or reinsurer for 

EU financial stability purposes (and vice versa) can be grounds for tennination of the 

Agreement. 

(d) U.S. state insurance regulators adopted the NAIC's reinsurance collateral refonn as a 

national accreditation standard effective January I, 20\9 (i.e. every state would have a 

confom1ing law or regulation by that date). The Agreement provides the states with 

additional time, potentially into 2023, to adopt measures consistent with the Agreement. 

(c) The EU will not impose a Solvency II worldwide group capital requirement on US. 

insurers and reinsurers operating in the EU for five years from the date of signature, and 

then only if the United States has not developed a group capital calculation as described 

in Article 4(h). 

(f) If the EU does not meet the obligations of Article 3 with respect to the 

elimination of local presence requirements, then U.S. state insurance regulators may 

impose a worldwide group capital requirement or assessment on EU insurers and 

reinsurers. The inverse is also true. 

(g) The EU will eliminate local presence laws within two years from the date of 

signature. 

(h) U.S. reinsurers operating in the EU will not be subject to collateral requirements, or 

the equivalent, within five years from the date of signature. 

(i) The Agreement provisions regarding the Joint Committee, Tennination and Mandatory 

Consultation, and Amendment will be effective upon the date of signature. 

Article I J Tennination and Mandatory Consultation 

Subject to the procedures established in the Agreement, the Agreement can be tcm1inated at any 

time by either party. 

o. Article 12-- Amendment 

Article 12 sets forth the process for amending the Agreement. 

7 
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Question Number Two 

The Agreement opened the entire EU reinsurance market to U.S. reinsurers, spared U.S. industry 

operating in the EU potentially billions of dollars in compliance costs, and embraced the U.S. 

state regulatory approach to insurance group supervision, thereby conferring on U.S. consumers 

and industry the wide range oflegal benefits described in reply to Question Number One. 

Stakeholders were consulted extensively before and throughout the negotiation of the 

Agreement. For purposes of the Agreement negotiations, Treasury and USTR created and 

successfully utilized an unprecedented mechanism to include U.S. state insurance regulators the 

negotiation of an international agreement. For example, a total of ten regulators from nine states 

participated as members of the U.S. state insurance regulator task force that contributed 

significantly throughout negotiations of the Agreement, three of whom also served on FACI. 

The Federal Advisory Committee on Insurance (FACT) was first created in 2011. FACT's 

existence and endeavors are guided by the Federal Advisory Committee Act (Pub.L. 92-463, 86 

Stat. 77 (1972)). Given that Treasury and USTR engaged extensively with Congress, state 

regulators, and other stakeholders throughout the Agreement negotiations, and given that the 

Agreement provides material legal, financial and commercial benefit to U.S. consumers and 

industry, alteration of the FACI role would be both duplicative and unnecessary. 

Question Number Seven 

Congressional authority is not constrained by Title V of the Dodd-Frank Act. Further, the EU is a 

union of independent sovereign nations whereas every other counter-party would likely be a 

single nation. However, the Agreement involves prudential insurance and reinsurance measures, 

and is not a trade agreement. Without comment on matters of international trade, matters of 

prudential oversight such as those contained in the Agreement arc qualitatively different. For 

example, Congress does not "expedite rejection" or approval of NAIC model laws and 

regulations. 

As provided in Title V of the Dodd-Frank Act, frequent engagement with all four Congressional 

committees of jurisdiction was extremely meaningful and helpful throughout the negotiation of 

the Agreement. 

Question Number Eight 

Insurance markets are increasingly global, and multi-national U.S. insurers have tremendous 

opportunities for organic growth in the developing markets of Central and South America, Asia 

and Africa, and Eastern Europe. The Covered Agreement authority in Title V (the "FIO Act") of 

the Dodd-Frank Act may be necessary to address and resolve differences in the regulation of the 

business of insurance between the United States and other jurisdictions. 

8 
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For example, when the FIO Act became law in 2010, few in the United States or the EU knew 

whether and, if so, when or in what form, the ED's Solvency II regime would be implemented. 

The Agreement illustrates that the Covered Agreement authority can resolve important issues of 

cross-border insurance regulation and, at the same time, provide potentially billions of dollars in 

value to the U.S. consumers and industry. Due to the variability of potential fact patterns in 

increasingly globalized insurance markets, the FlO's Covered Agreement authority has an 

appreciably growing value to American interests, and potential expansion of the authority may be 

necessary. 

Question Number Nine 

No. A Covered Agreement can be negotiated with one or more foreign jurisdictions. 

The International Association of Insurance Supervisors (IAIS) is not a foreign jurisdiction 

but is a voluntary association of members formed under the laws of the Switzerland. In 

this sense, the IAIS is akin to the NAIC which, of course, is also a voluntary association 

of members formed under the laws of the United States but is not a "jurisdiction." 

Further, as detailed in reply to Question Number One, the Agreement demonstrates that 

Covered Agreement will be used to preserve and enhance the U.S. system of insurance 

regulation. 

Coneressman Hultgren 

A. Yes. Reinsurance agreements are subject to the principles of basic contract law. 

Amendments to contracts, regardless of the magnitude of the amendment, require an 

agreement of the parties to the contract. An amendment to a reinsurance agreement 

that could result in the reduction of collateral would require that both parties to that 

reinsurance agreement agree upon the amendment. Collateral could not be reduced if 

the ceding insurer did not also agree. 

B. The Agreement does not have retroactive application. The hypothetical of a reinsurer's 

scheme of arrangement (a "Part VII transfer of business"), or the application of a jurisdiction's 

unique legal or regulatory system, depends upon numerous complex variables and cannot be 

answered in the abstract. However, Article 3 of the Agreement preserves the authority of a ceding 

insurer's U.S. state insurance regulator to re-impose collateral and other requirements on a 

reinsurer that fails to satisfy the Agreement's financial condition and market conduct standards. 

Further, a Part VII transfer would likely trigger the standard provisions of a reinsurance 

agreement that allow the ceding insurer to accelerate the posting of collateral 

9 
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27201.065

UNITED STATES 

REPRESENTATIVE 

PROUDLY REPRESENTING WISCONSIN'S 7TH DISTRICT 

Commissioner Ted Nickel 

QUESTIONS FOR THE RECORD 

Hearing: "Assessing the U.S.-EU 

Covered Agreement" 

Date: February 16, 2017 

1) Some stakeholders of the covered agreement argue that the NAIC was never going to be 

satisfied with a covered agreement because the very notion of a covered agreement 

undermines the authority of state insurance commissioners and the state-based regulatory 

modeL Is there a better deal that you and the NAIC could live with? 

I believe it would be very dijjicult for even proponents of the covered agreement to say that we 

could not have gotten a better deal or one that is at least clear on its terms. Certainly, the NAIC 

is open to finding more workable solutions that fit with our national state-based regulatory 

system. In fact, after the hearing, we sent a letter to Secretary Mnuchin to obtain a better 

understanding of certain aspects of the agreement in order to determine whether it is in the best 

interest of the United States and. if so, how to implement it. We want relief for our US 

domiciled insurers operating in the European Union, but we also seek a deal that provides for 

finality and does not undermine important policyholder protections. 

For one, at bare minimum, we would clarifY a number of the provisions of the agreement 

particularly those relating to group supervision and capital. Second, the agreement should 

clearly resolve the equivalence question and provide recognition jbr the US insurance 

regulatory system. Third, while we acknowledge that the key priorityfbr the EU is to address 

collateral. if there is a renegotiation, the wholesale elimination of collateral has to be revisited 

US insurers and policyholders should not have to bear the full brunt of the counterparty risk 

posed by reinsurers. We would suggest more closely aligning the reinsurance collateral 

provisions to the NA/C's mode/law that already has been adopted by 35 states representing 213 

of the direct written premium in this country Under the model act, collateral is reduced on a 

reinsurer-specific basis only after an evaluation of the financial strength and quality of 

supervision of that particular reinsurer. Fourth, if the agreement is clear on its face, a joint 

committee should not be necessary But if the parties believe it still will be useful, the nature of 

the committee. its responsibilities and its membership should be clearly spelled out in the 

agreement and state insurance regulators should be included among its members. Otherwise, it 

appears state insurance regulators will be haggling constantlyfi·om afar about the 

implementation of the agreement and potential preemption pursuant to the agreement. Fifih, any 

renegotiation process should befar more transparent and allow for the actual direct and 

meaningful participation of all state insurance regulators. If all insurance regulators cannot be 

included directly, then structures should be created to ensure all can be briefed on progress and 

consulted on its terms. The process should allow for more robust stakeholder consultation and 

congressional oversight. Finally, under the Dodd-Frank Act, state laws are potentially subject to 

preemption pursuant to the terms of the agreement. Preemption of law is not a step to be 

undertaken lightly. If we are to avoid such steps unnecessarily or acquiesce to such steps, the 

agreement should be clear about what we are obtaining in return 
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The NAIC believes a better deal could have been made without undermining key policyholder 

protections. If we work together and allow foil participation of state insurance regulators, we 

could still achieve the .finality that is lacking in the current agreement. avoid undermining 

important consumer protections, and provide relief to U.S .. firms operating in the European 

Union. 

2) Your testimony mentions that the repercussions of this agreement will be paid for by U.S. 

insurers and policyholders. Can you elaborate? 

Certainly there are a .few large U.S. companies who operate abroad that require relief from the 

threat a,{ Solvency II requirements on their operations. Although these requirements are entirely 

of the EU's making, we very much sympathize with those concerns. However, benefits to those 

international companies pale in comparison with the costs imposed by the agreement when risk 

is sh[ftedfrom foreign reinsurers to U.S. ceding companies. 

The NAIC believes that the covered agreement will completely redefine the way we regulate 

reinsurers and will force the lVAIC to develop means other than collateral to provide U.S. 

policyholders the protections they need. Collateral is a proven tool to protect U.S. insurers and 

by extension policyholders.from the counterparty risks posed by reinsurers. A similar approach 

is used in a myriad of other .financial transactions including derivatives transactions, securities 

trades, etc. Insolvencies. while initially paid.for by insurers, are ultimately born by states' 

generalfimds through lower than expected premium taxes from insurers because <?f premium tax 

offsets. If collateral is eliminated, ceding insurance companies and by extension policyholders 

will be exposed to increased risks. Insurance regulators will be forced to explore other means to 

protect insurers and policyholders from these counterparty risks. For example, we may have to 

utilize a more European approach where ceding insurance companies bear the burden of 

accounting.for such counterparty risks through higher capital requirements. Alternatively, 

regulators could choose to apply collateral to all reinsurance transactions irrespective o.f where 

the reinsurer is located. In either event, the costs of the covered agreement will be borne by U.S 

insurers and ultimately their policyholders, who mayface higher premiums. 

Rep. Sean DuffY (WI-07) 
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27201.067

Questions for the Record 

Rep. Blaine Luetkemeyer (M0-03) 

"Assessing the U.S.-EU Covered Agreement" 

Committee on Financial Services 

Subcommittee on Housing and Insurance 

February 16, 2017 

To Commissioner Nickel 

l. You have advocated that this Covered Agreement be renegotiated. That will no doubt take 

time. What is the NAIC's plan to immediately assist U.S. based companies on the market 

access issues and the Solvency II compliance costs that would otherwise be addressed by this 

Covered Agreement? 

Commissioner Nickel on behalf of the NAIC: 

At the outset, I disagree with the premise that the covered agreement significantly reduces 

compliance costs for U.S. firms operating in the European Union. Most U.S. firms operating in 

the European Union were already organized through intermediate holding companies with 

either capitalized insurance subsidiaries or branch operations in a manner that complied with 

Solvency IL particularly the EU's local presence requirements. To the extent that such firms 

have compliance costs associated with operating in the EU (such as reporting obligations), the 

terms (!fihe agreement do little to ameliorate that. In fact, it codifies them by providing for 

continued EU supervision over a U.S. insurer's EU operations. Similarly, to the extent some 

believe the agreement prevents the EU from applying its capital and governance standards 

extraterritorially, the EU cannot do that today in the absence of the agreement, nor has any EU 

member country attempted to do so. 

Further, while the agreement may provide some regulatmy relief for a few U.S.-based 

companies operating in the EU, the erosion of consumer protections and the burdens that 

smaller insurance companies in the United States may have cannot he overstated. Without 

collateral, risk to US. policyholders will increase, and the NAIC will have to find ways to 

address reinsurance counterparty credit risk, be it higher capital requirements on US. ceding 

companies, or some other mechanism that sh!fis the risk to all reinsurers operating in the US. 

Of course, if a reinsurer jails to support a ceding company in the event of a catastrophe, the 

costs to American consumers could potentially be far greater than any perceived benefits from 

the covered agreement. The cost of any insolvency resulting_from uncollectible reinsurance, or 

otherwise, will be absorbed by U.S. insurers and ultimately U.S. policyholders and taxpayers. 

Nevertheless, the NAIC takes seriously the EU's disparate treatment of U.S. insurers, which is 

why after the hearing, the NAIC sent a letter to Secretary Mnuchin asking him to reengage the 

EU and seek clarification on several of the agreement's provisions. Such clar{ftcation will 

enable insurance regulators, the Treaswy Department, Congress, and stakeholders to fully 

evaluate the benefits of the agreement to the US. And, !fit the agreement is in the best interest 

of the US., such clarifications will eliminate ambiguities so that the states are not expending 

time and resources attempting to implement the agreement in a manner that may not meet the 
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expectations of the EU. In the event the agreement is not in the best interest of the U.S. insurance 

sector, we would hope the Treasury Department will seek renegotiation of key provisions. In any 

renegotiated covered agreement, we would expect the local presence requirements to be 

eliminated, mutual recognition and equivalence to be clearzv addressed, and the resolution of 

ambiguities in a way that is beneficial to the U.S. insurance sector. Under the Dodd-Frank Act, 

state laws are potentially subject to preemption pursuant to the terms of the agreement. 

Preemption of law is not a step to be undertaken lightly. {f we are to avoid such steps 

unnecessarily or acquiesce to such steps, the agreement should be clear about what the US. is 

obtaining in return. 
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27201.069

• 

AprillO, 2017 

AMERICAN 

INSURANCE 

ASSOCIATION 

The Honorable Sean Duffy, Chairman 

Subcommittee on Housing and Insurance 

House Financial Services Committee 

U.S. House 

Washington, DC 20515 

VIA Electronic Mail 

55512thStreetNW 

Suite550 

Washington, DC 20004 

202-82&.7100 

Fax202-293-i219 

W\.¥Waiadcorg 

RE: Answers of AIA CEO Leigh Ann Pusey to Requested Questions for the Record for 

Subcommittee Hearing Titled "Assessing the lJ.S.-E.U. Covered Agreement" 

Dear Chairman Duffy: 

Thank you again for the to testify before the Financial Services Committee's 

Housing and Insurance Subcommittee at the hearing titled "Assessing the U.S.-E.U. Covered 

Agreement." As please t1nd below responses to numbered 7. 8. & 9 that 

were identified in Questions for the Record document 

March 21. 20 !7 as those to be answered by all witnesses. 

7) ln the EU. both the European Council and the Parliament must affirmatively 

approve or the covered agreement. In the Congress doesn't even have the power 

to expedite rejection of such an agreement much less it. As the Financial 

Services Committee considers this agreement, and future international insurance 

agreements, should we consider a new and more robust role 1or Congress" 

AlA would urge caution here. Unlike traditional international trade agreements, 

international insurance agreements (or "covered agreements," as they are termed under 

Dodd-Frank) must balance the affairs power with the McCarranFerguson Act, which delegates the primary the business of insurance to the 

states. lf Congress assumed a more robust role, a role would undermine the primacy t>( 

state insurance regulation, which is otherwise protected and preserved throughout Title V t~l 

the Dodd-Frank Act (in addition to being explicit(y recognized in Titles 1,11 and .:xJ. 

We believe that the Financial Services Committee can strike the right balance by amending 

Title V to provide a dedicated consultation mechanism for the state insurance regulators. That 

mechanism would be different from the Federal Advisory Committee on Insurance, and would 

be an exclusive policy channel fllr the state insurance regulators with those federal offices that 

are charged with executing international insurance regulatory negotiations. 
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27201.070

8) With this covered agreement, FlO has the power to preempt a State insurance measure if the 

Director determines that the measure "results in less favorable treatment of a non-United 

States insurer domiciled in a foreign jurisdiction that is subject to a covered agreement than a 

United States insurer domiciled, licensed, or otherwise admitted in that State." Although not 

explicitly cited in the statute, this is generally understood to be a reference to a reinsurance 

collateral agreement with the EU. If the agreement enters into force, do we still need covered 

agreement authority as outlined in Dodd-Frank? 

Yes. As noted in the question, the power of federal preemption envisioned by Title V of the 

Dodd-Frank Act is exceedingly narrow, but the value of the covered agreement authority is 

not. Interpreted correctly, the recently-concluded covered agreement provides valuable 

precedent for foreign jurisdiction acknowledgement, acceptance, and even recognition of the 

U.S. state-based insurance regulatory system. AlA believes that this precedent, repeated in 

future covered agreements with other foreign jurisdictions, provides "Team USA" with 

negotiating leverage in all international discussions that involve insurance prudential, 

supervisory, or regulatory initiatives to demand flexibility to accommodate the U.S. system and 

to maintain the competitiveness of the U.S. insurance industry. 

9) Some have expressed concerns that the Executive Branch could use the authority under 

Dodd-Frank for a covered agreement to achieve an agreement on capital standards with the 

International Association of Insurance Supervisors (IAIS). Do you think that the language in 

Dodd-Frank for covered agreements gives the Executive Branch that authority? 

No. There is nothing in the Dodd-Frank Act that permits the Executive Branch to bypass the 

state insurance regulatory system and agree to an overarching capital requirement that the 

states would be forced to implement. Indeed, neither the U.S. Constitution nor the DoddFrank Act grants the Executive Branch the power to import foreign insurance capital 

standards and force their adoption on the states, or enlarge state sovereign authority over the 

business of insurance beyond state borders. 31 U.S.C. § 313(k), added by Dodd-Frank, 

reinforces this point: "Nothing in this section or section 314 {covered agreements} shall be 

construed to establish or provide the {Federal Insurance} Office or the Department of the 

Treasury with general supervisory or regulatory authority over the business of insurance." As 

a result, the Dodd-Frank Act - even as it establishes a covered agreement vehicle- reaffirms 

the delegation of regulatory authority over the business of insurance to the states under the 

McCarran-Ferguson Act. 

Respectfully submitted, 

Leigh Ann Pusey 

President & CEO 

American Insurance Association 

0