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25–593 PDF 2017

S. HRG. 115–24 

EXAMINING THE U.S.–EU COVERED AGREEMENT 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE U.S.–EU COVERED AGREEMENT TO GATHER THE PERSPECTIVES OF THE PARTIES INVOLVED WITH CRAFTING OR WHO 

ARE AFFECTED BY THE COVERED AGREEMENT 

MAY 2, 2017 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JARED SAWYER, Senior Counsel 

BRANDON BEALL, Professional Staff Member 

GRAHAM STEELE, Democratic Chief Counsel 

MEGAN CHENEY, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, MAY 2, 2017 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESSES 

Michael T. McRaith, Former Director, Federal Insurance Office, Department 

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

Prepared statement .......................................................................................... 29 

Responses to written questions of: 

Senator Corker .......................................................................................... 82 

Julie Mix McPeak, Commissioner, Tennessee Department of Commerce and 

Insurance, on behalf of the National Association of Insurance Commissioners ................................................................................................................... 5 

Prepared statement .......................................................................................... 46 

Responses to written questions of: 

Senator Corker .......................................................................................... 82 

Michael C. Sapnar, President and Chief Executive Officer, Transatlantic Reinsurance Company, on behalf of the American Insurance Association, 

American Council of Life Insurers, and the Reinsurance Association of 

America ................................................................................................................. 7 

Prepared statement .......................................................................................... 50 

Stuart Henderson, President and Chief Executive Officer, Western National 

Mutual Insurance Company, on behalf of the National Association of Mutual Insurance Companies ................................................................................... 9 

Prepared statement .......................................................................................... 70 

David Zaring, Associate Professor of Legal Studies and Business Ethics, The 

Wharton School, University of Pennsylvania .................................................... 11 

Prepared statement .......................................................................................... 75 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Views of the Cincinatti Insurance Companies on Covered Agreements ............. 84 

(III)

(1) 

EXAMINING THE U.S.–EU COVERED 

AGREEMENT 

TUESDAY, MAY 2, 2017 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 10:02 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

Today we are joined by a panel of witnesses who will provide the 

Committee with a comprehensive discussion of the U.S.–EU Covered Agreement. These witnesses represent a broad range of views 

on the agreement, including companies in support and in opposition. 

We will also hear from the lead negotiator of the Covered Agreement, a representative of State insurance commissioners, and, finally, an independent expert specializing in international financial 

regulation. 

In the United States, a State-based model for insurance regulation has been the preferred standard for over 100 years and was 

solidified with the passing of McCarran–Ferguson in 1945. With an 

ever-increasing globalization of insurance and reinsurance services, 

it is healthy to examine and debate how the American model fits 

within the global regulatory framework. 

Title V of the Dodd–Frank Act authorized the Federal Insurance 

Office, within the Department of Treasury, and the U.S. Trade 

Representative to enter into ‘‘covered agreements’’ with foreign jurisdictions regarding prudential regulation of insurance and reinsurance. 

In November 2015, this Committee was notified that the United 

States planned to begin negotiations with the EU on a covered 

agreement. In notifying Congress, the Obama administration laid 

out several priorities it hoped to achieve from the negotiations, including equivalence for U.S. insurers with respect to Solvency II 

and gaining EU recognition of the U.S. insurance regulatory framework. 

In January, this Committee was presented with a final Covered 

Agreement negotiated between the United States and the European Union. The Covered Agreement represents more than a year 

of negotiations on many complex, cross-border regulatory issues. 

The terms of the agreement address three main areas of prudential 

2 

insurance supervision: reinsurance, group supervision, and information sharing. 

I look forward to engaging with our witnesses on a number of important questions. 

First, I would like to better understand the implications for the 

U.S. insurers and the State insurance commissioners on the removal of reinsurance collateral requirements. 

Second, what benefits will U.S.-based, internationally active insurance and reinsurance companies receive from the agreement? 

Third, what are the implications of the group supervision and 

group capital requirements for our U.S. regulatory framework? 

And, finally, if an exchange of letters is necessary to clarify the 

agreement, what are the items that must be addressed, and can 

the items be addressed without reopening the agreement? 

As a new Administration undertakes its review of the Covered 

Agreement and Congress provides input, these are some 

foundational questions that must be addressed. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, for holding today’s 

hearing. Thanks to the witnesses for your testimony. It is good to 

meet you all. 

Our State-based insurance system is unique, as we know, 

throughout the world. It has largely served us well. We should 

fight to maintain it, including by rejecting efforts to impose the Solvency II accord, Europe’s insurance capital rules, on our insurers. 

At the same time, it means that companies that want to operate 

internationally face challenges. We need a system that works, too, 

for them. 

The financial crisis of several years ago, almost a decade ago, 

showed there were shortcomings in the consolidated supervision of 

international insurance conglomerates. Since the crisis, State insurance regulators have worked on proposals to develop comprehensive supervision and capital frameworks for insurance companies. While some progress has been made, there is clearly much 

to be done. 

At the Federal level, the Federal Reserve’s work on both fronts 

has been encouraging. It has proposed a useful group capital 

framework for the insurers that it supervises. It has developed consolidated governance and risk management standards for systemically important insurers. 

Turning to the Covered Agreement that we are here to discuss, 

as a single entity that speaks on behalf of the U.S. on insurance 

matters, I believe that the Federal Insurance Office, Mr. McRaith 

in particular, has served a valuable role. This agreement offers 

U.S. and EU reinsurers alike relief from both requirements to have 

a local presence and local collateral. It is not a small consideration 

when EU countries like Germany have put our companies on notice 

to set up physical locations, which surely is a significant cost to 

U.S. companies. It also establishes certainty about when U.S. 

standards will qualify as equivalent under Solvency II for U.S. insurers, preventing Europe from imposing its rules on our companies, if not permanently at least for 5 years. To the extent that 

3 

there is some disagreements on the meaning of terms in the agreement, particularly as they relate to capital, I hope today’s hearings 

will offer an opportunity to clarify those terms. If there are concerns about the level of transparency and consultation in this and 

other international negotiations, that is certainly a matter that 

should be debated, including whether any reasonable reforms are 

necessary. 

Let me close with two concerns that I have. 

First, I am concerned by efforts to hamstring or eliminate FIO. 

Eliminating an important voice domestically and internationally on 

insurance regulations, handing these negotiations over to the U.S. 

Trade Rep who lacks insurance expertise would be a step in the 

wrong direction. 

Second, I do not think the answer to discontent with the process 

of some of these international financial discussions is to include financial regulations in future free trade agreements. Former Treasury Secretary Lew said that watering down in any way U.S. regulatory standards is not appropriate in trade agreements, and I 

think there is a resounding emphasis that we all have on that. He 

said the U.S. should call on the world community in appropriate 

settings like the G–20 and the Financial Stability Board ‘‘to try to 

drive that race to the top,’’ his words, instead of the other way, 

mine. 

We should push other countries to raise standards, not engage in 

a race to the bottom, as so many of these free trade agreements 

do and have done. I am skeptical that the answer to concerns about 

transparency in insurance agreements is to replace them with a 

trade negotiation process where corporate CEOs often have better 

access to information about trade negotiations than the American 

people’s elected representative, a significant problem over the last 

2 or 3 years during the negotiations of the Trans-Pacific Partnership. 

So, again, I thank the Chairman for holding this hearing, and I 

look forward to hearing from our witnesses. 

Chairman CRAPO. Thank you, Senator Brown. 

As we go to our witnesses today, first we will receive testimony 

from Michael McRaith, former Director of the Federal Insurance 

Office at the U.S. Department of Treasury. 

Second, we will hear from Commissioner Julie Mix McPeak of 

the Tennessee Department of Commerce and Insurance, on behalf 

of the National Association of Insurance Commissioners. 

Next we will hear from Michael Sapnar, CEO of Transatlantic 

Reinsurance, on behalf of the American Insurance Association, the 

American Council of Life Insurers, and the Reinsurance Association 

of America. 

Then we will hear from Stuart Henderson, CEO of Western National Mutual Insurance Company, on behalf of the National Association of Mutual Insurance Companies. 

And, finally, we will hear from David Zaring, associate professor 

of legal studies at the Wharton School at the University of Pennsylvania. 

As we move to our witnesses, I want to remind our Senators that 

when we go to questions, we will hold ourselves to our 5-minute 

limit. Sometimes Senators want to move that up a little bit. 

4 

And to the witnesses, that may happen at the end of the 5 minutes of the Senator. I encourage you, when that happens, to try to 

keep your responses as brief as possible so we can let every Senator have an opportunity for questions. 

To the witnesses, also, you have been asked to keep your verbal 

remarks to 5 minutes. You will have many opportunities to add to 

and supplement them, and your written testimony has been made 

a part of the record. 

With that, let us begin. Mr. McRaith. 

STATEMENT OF MICHAEL T. MCRAITH, FORMER DIRECTOR, 

FEDERAL INSURANCE OFFICE, DEPARTMENT OF THE 

TREASURY 

Mr. MCRAITH. Chairman Crapo, Ranking Member Brown, Members of the Committee, thank you for inviting me to testify. I appear on my own behalf today as the former Director of the Federal 

Insurance Office at Treasury and as Treasury’s lead negotiator for 

the Covered Agreement. 

First, thanks to Commissioner McPeak and her colleagues for the 

integral role they played in the negotiation. 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 when they joined by telephone. 

Through a confidential web portal, State regulators received 

every EU document shortly after it arrived. Before any U.S. document was sent to the EU, we shared it with the States and then 

held a conference call to receive their input. State regulators were 

an essential part of our negotiating delegation. 

The prudential issues addressed by the agreement are not new. 

Reinsurance collateral reform and Solvency II implications have 

long been discussed in the United States. The agreement brings 

closure to these issues. 

The States have undertaken to reform reinsurance collateral requirements, reform that benefits EU reinsurers, and in exchange, 

the States receive nothing of benefit for the U.S. industry operating 

in the EU. Nothing. 

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

the entire EU market on the same terms as EU reinsurers operating in the U.S. For U.S. insurer groups, the agreement caps the 

application of Solvency II to the EU operations of U.S. insurers. 

The agreement affirms that the U.S. supervises its insurance sector 

as the U.S. deems appropriate. This 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 both in the EU and the U.S., does not prescribe the content or the manner of that calculation. The agreement endorses 

what the States 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 EU nor the U.S. 

receive the benefits of the agreement without satisfying the conditions. And if a question arises, the agreement provides a resolution 

5 

mechanism. If all conditions are satisfied within the 5-year period, 

then the terms of the agreement become permanent. 

In 2016, U.S. reinsurers lost existing business in the EU and opportunities for new business. In 2016, U.S. primary insurers operated with uncertainty about treatment by their EU supervisors, including whether they would be required to establish multiple subsidiaries. 

We entered into negotiations seeking to improve the rigor, uniformity, and consumer protections of U.S. reinsurance oversight. 

We sought to include 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. 

industry operated in the EU on a level playing field. We achieved 

these goals, saving our industry potentially billions of dollars. 

While providing equal benefits to the EU, this Covered Agreement 

puts America first. 

Now, our diverse insurance sector will always include skeptics. 

Some opponents might complain about a projected hypothetical 

concern in 5 years as if just one more piece of writing is necessary, 

even when that writing would entirely duplicate what is already in 

the agreement. But this is not the time for the predictable insurance debate about statutory prerogatives or who does what. This 

is not a theoretical discussion about conceptual international standards of zero effect in the U.S. 

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 EU employs more Americans or fewer. Will U.S. industry grow 

or will it be stifled? 

Now is the time to show American leadership, to skip the usual 

insurance script, and to endorse this resolution of a real-time 

threat to U.S. insurers’ growth and to insurance jobs in States 

around our country. Now is the time to solve a real problem, and 

this agreement does just that. 

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

Chairman CRAPO. Thank you. And before we move to Ms. 

McPeak, I should indicate some of you may notice that the room 

is a little bit unusually warm. If you are feeling that, it is not necessarily because you are nervous. It actually is a little bit too warm 

in here. We are trying to get that fixed, and we apologize. 

Ms. McPeak, please proceed. 

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

BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE 

COMMISSIONERS 

Ms. MCPEAK. Thank you, Chairman Crapo, Ranking Member 

Brown, and Members of the Committee. I appreciate the opportunity to testify today on behalf of State insurance regulators. 

My written testimony details the NAIC’s concerns with the EU 

Solvency II regime and its equivalence process, our historical dialogs with the EU to resolve the issue, and the subsequent negotiations of a potentially preemptive Covered Agreement. While we 

6 

take serious issue with the lack of meaningful involvement in those 

negotiations and believe there are lessons to be learned going forward, my testimony today will center on the agreement’s substance. 

The focus from supporters has been on the perceived benefits of 

the agreement for the subset of U.S. firms doing business in the 

EU. However, as Congress and the Administration weigh the merits of the agreement, consideration must be given to what is sacrificed. 

With regards to reinsurance collateral, the NAIC has made great 

strides in addressing the EU’s concerns. Thirty-nine States representing 70 percent of the market have adopted the NAIC model 

reducing collateral. To drive further adoption, the model becomes 

an accreditation requirement on January 1, 2019. Notwithstanding 

our progress, this agreement fully eliminates collateral requirements and does not include a fulsome evaluation of a reinsurer’s 

creditworthiness. 

Considering that significantly reduced collateral protections represent commitments to policyholders, wiping them out will force 

regulators to find other mechanisms with which to protect them 

and insurers from the risks posed by reinsurance counterparties. 

Notably, the agreement contains several ambiguities that make 

it difficult to evaluate and implement. By way of example, it is unclear the extent to which regulators can even impose alternatives 

to collateral that address reinsurance counterparty risk. The agreement appears to supersede existing authority of regulators to obtain information currently authorized under State law. The agreement also requires a group capital assessment, but implies State 

insurance regulators must have authorities to remedy any deficiency with capital, even though other regulatory tools may be 

more appropriate. 

All of the ambiguities would have to be resolved by an undefined 

joint committee composed of representatives of the U.S. and EU, 

with no mention of a role for State insurance regulators. If the 

joint committee cannot reach resolution, this agreement may be 

voided, thereby creating the real prospect of perpetual renegotiation and uncertainty for the U.S. insurance sector. 

Earlier this year, Mr. McRaith testified to what he believed the 

agreement accomplished. Candidly, we were surprised. Notwithstanding our concerns with eliminating collateral, Mr. McRaith’s 

characterization of the agreement, if shared by the present Treasury Department and, more importantly, by the EU, is more promising than a plain reading of the text suggests. As such, the focus 

of our request to Congress, Treasury, and the USTR has evolved 

to urge confirmation of some of these key assertions. 

Last week, the NAIC submitted to Treasury and USTR a list of 

provisions to be clarified before the United States moves forward 

with implementation of the agreement. We urge the Administration 

to expeditiously provide the needed clarity of these provisions now 

rather than taking an imprudent leap of faith that differing interpretations will be worked out later through a joint committee. 

Absent this, there is no assurance that State implementation will 

meet the terms of the agreement and satisfy the current Administration or the EU. That could put us in a position of changing State 

7 

laws only to have the EU challenge compliance at a later date and 

revert to unfair treatment of U.S. companies. Under these circumstances, it is hard to see how our sector can achieve certainty 

and finality regarding their concerns. We simply want to ensure 

that all parties agree that we have the deal that we have been told 

that we have. 

Confirmation can be achieved without renegotiation and without 

undue delay. Without clarification, it is entirely unacceptable to 

ask 50 State Governors, legislatures, and regulators to revise fundamental elements of our system based on the informal interpretations of a former Treasury official. Such confirmation of intent will 

also ensure that the EU will not be able to use the agreement’s ambiguity as a means of imposing their regulatory system and ultimately their will on our insurance sector to the detriment of U.S. 

insurance companies and policyholders. 

In conclusion, working together, we can obtain a level of comfort 

and clarity that will achieve finality and certainty for our sector 

without sacrificing consumer protections. As the States are the primary regulators of the insurance sector and it will be our responsibility to implement the provisions of the agreement, our involvement and buy-in is essential to its success. We have confidence 

that, through the bipartisan efforts of this Congress as well as commitment of this Administration, we can resolve the ambiguities and 

ensure that the U.S. obtains the best deal possible for our constituents. 

Thank you again for the opportunity to share our views, and I 

am pleased to answer any of your questions. 

Chairman CRAPO. Thank you very much. 

Mr. Sapnar. 

STATEMENT OF MICHAEL C. SAPNAR, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, TRANSATLANTIC REINSURANCE COMPANY, ON BEHALF OF THE AMERICAN INSURANCE ASSOCIATION, AMERICAN COUNCIL OF LIFE INSURERS, AND THE REINSURANCE ASSOCIATION OF AMERICA 

Mr. SAPNAR. My name is Michael Sapnar, and I am president 

and CEO of Transatlantic Reinsurance Company. I am testifying 

today on behalf of my company, the RAA, the American Insurance 

Association, the American Council of Life Insurers, and the Council 

of Agents and Brokers. I am pleased to appear before you today to 

express our strong support for the Covered Agreement between the 

U.S. and the European Union. I commend Chairman Crapo and 

Ranking Member Brown for holding this important hearing and 

welcome the opportunity to address the Banking Committee. 

We strongly support prompt signing of the Covered Agreement, 

which is consistent with our equally strong support for the Statebased insurance regulatory system. The Covered Agreement is a 

targeted Federal tool that supplements the State-based system by 

dealing with important international regulatory issues that State 

regulators cannot constitutionally address. It does not create regulatory authority at the Federal level, and the limited preemption 

authority is narrowly targeted to the collateral issue. 

I would like to make two main points today. 

8 

One, the Covered Agreement provides U.S. companies full access 

to the world’s largest insurance market without having to establish 

a local presence or be subject to European regulation, capital, and 

governance standards. 

Two, prompt signature is critical to full realization of the agreement’s benefits, and any requests for clarification are unnecessary 

and may jeopardize the deal. 

First, the Covered Agreement addresses multiple issues, many of 

which have been outstanding for years. It is a shrewd deal for the 

U.S. as we gain access through a mutual recognition approach 

without compromising our regulatory structure and by simply accelerating or formalizing initiatives around collateral and capital 

that State regulators have already begun to address. 

One of the agreement’s key attributes is the avoidance of applying the EU Solvency II insurance regulation and capital requirements to U.S. companies. In 2014, U.S. State regulators wisely decided not to seek Solvency II equivalence because of its inflexibility 

and the changes that would be required to the U.S. system, which 

has been proven. However, without this equivalence designation, 

U.S. reinsurers could only trade in the EU if they have a Solvency 

II-compliant branch in every country where the business is conducted or they have a subsidiary in a third country that has been 

deemed equivalent. 

In 2012, I testified to the House Insurance Subcommittee about 

the issues and obstacles like equivalence that my company, 

TransRe, and our peers were encountering in the EU. Since then, 

Transatlantic Re has been forced to move capital and jobs from the 

U.S. to the EU, has lost business in certain EU member countries, 

and has incurred significant additional compliance costs, all of 

which make us less competitive. The Covered Agreement, however, 

places us on equal footing. The agreement provides U.S. companies 

with the benefits of Solvency II equivalence without its requirements. U.S. companies get full access to the EU without having to 

establish a local presence and without being subjected to European 

group governance and capital standards. 

Second, it is critical that the Administration promptly sign the 

Covered Agreement. Delaying signature could eliminate benefits 

U.S. companies receive under the agreement. EU countries are not 

currently enforcing Solvency II on U.S. companies in anticipation 

of signature of the agreement. For example, the German regulator 

is conditionally suspending its local presence requirements for U.S. 

reinsurers pending signature of the agreement. If the agreement is 

delayed or not finalized, they will apply the rules, perhaps retroactively, to U.S. companies. 

In fact, without the Covered Agreement, U.S. reinsurers lost significant business at January 1, 2017, because of these local presence requirements. If the Covered Agreement is not signed, U.S. 

companies will not be able to renew much less write any new business in the EU without first creating branches in member States 

or subsidiaries in equivalent countries. These adjustments require 

time and relocation of capital and people from the United States, 

and they raise costs. It is imperative that U.S. companies and the 

EU market have timely certainty regarding U.S. companies’ ability 

to write business in the EU when the renewal process begins in 

9 

early September. Failure to act promptly will adversely affect U.S. 

companies’ ability to acquire and retain business. 

In addition, the Covered Agreement should not be delayed by requests for clarification or suggested improvements in the process. 

A few companies have requested a formal signed clarification of 

certain provisions before the agreement is signed. The joint committee in the agreement is intended to address the exact types of 

issues being raised. It is also likely that this clarification would be 

viewed as an attempt to renegotiate the agreement. 

Finally, some of the objections seem to stem from process rather 

than product. However, this agreement was conducted in accordance with law, and no one has asserted otherwise. 

In conclusion, the Covered Agreement is a narrowly tailored tool 

that solves real costly problems for U.S.-based companies while 

providing the first formal recognition of the strength of the Statebased system. It is time to sign the agreement and begin the implementation process. 

Thank you. 

Chairman CRAPO. Thank you, Mr. Sapnar. 

Mr. Henderson. 

STATEMENT OF STUART HENDERSON, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, WESTERN NATIONAL MUTUAL INSURANCE COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES 

Mr. HENDERSON. Good morning, Chairman Crapo, Ranking Member Brown, and Members of the Committee. Thank you for holding 

this important hearing. 

My name is Stu Henderson. I am the president and CEO of 

Western National Insurance Group. Western National is a mutual 

company which has been serving policyholders since, well, over 115 

years. Originally formed in St. Paul, we now operate as a regional 

insurance company serving individuals, families, and businesses all 

over the Midwest, Northwest, and southwestern U.S., plus Alaska. 

I am here today on behalf of the National Association of Mutual 

Insurance Companies. NAMIC is the largest property/casualty insurance trade in the country, with 1,400 members representing 

nearly 40 percent of the U.S. market. I have had the privilege of 

serving as the association’s chairman 2 years ago, and I have a 

deep appreciation for and understanding of its membership. 

NAMIC also appreciates the Committee’s focus on the recent 

U.S.–EU Covered Agreement. This bilateral agreement merits careful scrutiny to understand its impact on the U.S. domestic insurance industry and our policyholders. 

Let me start by clarifying. Western National is a U.S.-only company. Just like the vast majority of the U.S. insurance industry, we 

do not operate internationally. However, we deal with international 

reinsurers all the time, and, in fact, I once worked for an international reinsurance company. 

The implementation of Solvency II in 2016, the EU’s new insurance regulatory system, has created heightened regulatory requirements for U.S. companies doing business in EU all because the 

U.S. has not been deemed equivalent under the EU’s new system. 

10 

This has created a real and present difficulty for a relatively small 

number of U.S. insurers and reinsurers doing business in the U.S. 

To summarize, under a new, untested, and unproven regulatory 

scheme, the EU, number one, granted itself the role of supreme arbiter of valid insurance regulation; two, decided that the 150-yearold U.S. system was inadequate and not good enough for them; 

and, three, proceeded to treat U.S. companies unfairly. All of a sudden, U.S. companies need heightened scrutiny at the group level 

and reinsurers need a local presence to continue doing business in 

the EU—all this after allowing those very same insurers to safely 

operate in Europe for decades. It would seem to me that the appropriate response to this would be for the U.S. Government to strenuously object and to demand the mutual recognition of our system 

of regulation. Instead, they have attempted to solve this narrow 

problem invented by the EU and in the process have created a 

whole new set of problems. 

To obtain permanent recognition of the U.S. insurance regulatory 

system as mutual or equivalent, the FIO and USTR negotiated an 

agreement to eliminate requirements for those EU insurers to post 

collateral in the U.S. to meet their obligations. Even if we stipulate 

that the equivalence problem can only be addressed through a Covered Agreement and that forfeiting $40 billion of reinsurance collateral is necessary to solve it, the agreement fails on its own 

terms. There is no language anywhere in the Covered Agreement 

that confirms U.S. group supervision as mutually recognized or 

equivalent. In exchange for the release of $40 billion of collateral, the EU 

has only agreed to return U.S. insurers to pre-Solvency II status, 

and there is no guarantee that this reprieve will continue at the 

end of the 5-year term. Uncertainty is the enemy of business and 

of good Government. 

But the EU is not satisfied there. They successfully negotiated 

additional changes to the regulatory system. Specifically, the agreement requires a group capital standard for U.S.-based insurance 

companies. If that standard is not adopted, the EU will not live up 

to its side of the agreement. If it is adopted, it will impact those 

of the 94 percent of the 3,200 property/casualty companies in the 

U.S. who do not do business internationally such as Western National. 

Section 4(h)(2) of the agreement clearly states that the new U.S. 

group capital standard must apply to worldwide parent undertaking and include corrective or preventive measures up to and including capital measures. This would mean increases in capital, 

movement of capital between affiliates, and/or fungibility mandates. This is plainly not a simple capital calculation, such as the 

NAIC has been contemplating for the U.S. In fact, this kind of 

group capital standard will shift the U.S. from a legal entity regulatory system protecting policyholders to an EU-style group supervision system designed to protect investors and creditors. This is 

not a win for U.S. policyholders whom we represent. 

This agreement is bad for the vast majority of U.S. insurers who 

lose reinsurance collateral protection and get nothing but new requirements in return. We urge Congress to work with the Administration to resolve issues with the current agreement. While we canVerDate Nov 24 2008 13:33 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\05-02 ZZDISTILLER\50217.TXT JASON
11 

not allow the EU to continue treating U.S. insurers operating there 

unfairly, this current deal costs U.S. companies only too much and 

falls short of obtaining mutual recognition of our regulatory system. At a minimum, we need to begin a process to formally clarify 

aspects of the agreement and, if necessary, the U.S. should not 

hesitate to go back to the drawing board and secure a better deal. 

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

forward to answering your questions. 

Chairman CRAPO. Thank you. 

Mr. Zaring. 

STATEMENT OF DAVID ZARING, ASSOCIATE PROFESSOR OF 

LEGAL STUDIES AND BUSINESS ETHICS, THE WHARTON 

SCHOOL, UNIVERSITY OF PENNSYLVANIA 

Mr. ZARING. I am an associate professor of legal studies at the 

Wharton School, and I study international financial regulation 

there. It is a pleasure to be here today. I want to put the Covered 

Agreement in context, and in my testimony on the agreement between the United States and the European Union, I would like to 

focus on three points. 

First—and this is the point on which I will spend the most 

time—the Covered Agreement grew out of an effort in the wake of 

the financial crisis to improve the regulation of financial companies, including insurance companies, given the repercussions of the 

failure of the large insurance company AIG during that crisis. For 

insurance, that effort has involved a number of different channels, 

and the goals have been twofold: 

One has been to make sure that globally active insurance companies are sensibly regulated as whole enterprises rather than as a 

series of operating subsidiaries in a variety of different jurisdictions. 

The second has been to ensure that internationally active insurance companies and reinsurance companies have faced a level playing field when it comes to doing business at home or overseas. 

The Covered Agreement accompanies efforts to reduce nontariff 

barriers through trade agreements and efforts to increase the quality of global insurance supervision through organizations like the 

International Association of Insurance Supervisors. It offers the reduction of two barriers to trade and two regulatory agreements 

that will improve the supervision of insurance conglomerates in 

both the United States and Europe, serving objectives identified by 

regulators and trade negotiators in the wake of the financial crisis. 

As a general matter, covered agreements are meant to serve as 

a bilateral backstop for regulatory cooperation in cases where multilateral regulation has not made progress. An analogy might be 

drawn to this country’s approach to trade. When multilateral 

agreements like the Doha Round have foundered, the United States 

has increasingly looked to pursue its trade interests through regulatory cooperation or bilateral trade and investment deals. 

In the case of post-crisis insurance supervision, the hope evinced 

in Dodd–Frank is that where multilateral efforts to either level the 

playing field or to improve the supervision of systemically risky insurance companies has foundered, bilateral covered agreements 

might serve as a useful supplement. It can stand in stead when the 

12 

trade negotiations are not working or are not appropriate or when 

multilateral regulatory cooperation is going too slowly. 

Second, the agreement deepens cooperation through an exchange 

of information, includes a deal that reduces trade barriers in both 

the United States and the European Union, and provides a sensible 

framework, in my view, for the supervision of insurance conglomerates and groups. As a matter of content, it is likely to be good 

for insurance companies and consumers. And, in addition, it 

rationalizes the supervision of insurance companies by looking at 

the totality of their operations, just as banking supervisors do 

when it comes to banking financial conglomerates. 

Third, the critics of the transparency of the process in concluding 

the Covered Agreement are, in my view, misguided. The United 

States never hid the fact that it was engaging in negotiations with 

the European Union, and now that the result of those negotiations 

have been made public, the covered agreement is being appropriately reviewed by Congress, as it is in this hearing that we are 

all pleased to be at today, and by the stakeholders who are most 

likely to be affected by the agreement. That is the right way to conduct transparent international processes: congressional approval to 

engage in international negotiations is given beforehand, and the 

results of those negotiations are reviewed after the fact. Requiring 

more and different consultations during the negotiation would be 

both inconsistent with the way the negotiations work and I think 

entirely unnecessary process. I would also like to emphasize that 

the Covered Agreement itself provides for an elaborate panoply of 

procedural protections when it comes to the implementation of the 

accord, protections that I think will involve State insurers, State 

insurance regulators, and other stakeholders with a stake in the 

agreement. 

More generally, international regulatory cooperation is not easy, 

and it must certainly be paired with procedural protections; but the 

United States cannot ignore the efforts and interests of foreign regulators when it thinks about its own position in international financial markets. The global effort to create a single common set of 

accounting standards exemplifies the risks of failing to engage. The 

United States largely stayed out of that process, but the resulting 

International Financial Reporting Standards have now been adopted by essentially every jurisdiction in the world except one. And 

the Securities and Exchange Commission is now accepting IFRS for 

foreign filers. This country can take a leadership role in devising 

international regulatory standards, or it can let others develop the 

standards and adopt them later. But it cannot ignore them. 

Thank you, and I look forward to your questions. 

Chairman CRAPO. Thank you very much, and I commend all of 

our witnesses for paying attention to the clock. That is truly appreciated. 

I want to start out my questions with regard to the question of 

an exchange of letters. Obviously, from the testimony you can see 

here that there is some disagreement about whether there is adequate clarity in the agreement on certain issues. 

Perhaps first I should ask you, Ms. McPeak, do you agree—I 

think I heard you say in your testimony that if the agreement 

means what it has been said to mean, you do not have as many 

13 

concerns, but it is not that clear in the text of the agreement. Is 

that a fair estimate or statement of what you said? 

Ms. MCPEAK. I think that is fair, Mr. Chairman. I believe that 

our members would not oppose the agreement if we could reach 

clarity on some of the ambiguities that we have provided through 

staff in a list to this Committee, actually. 

Chairman CRAPO. And so you and some others, I think, or at 

least some have suggested that we have an exchange of letters, 

that the USTR and Treasury work to have an exchange of letters 

to provide clarity up front as to what the actual meaning of the 

terms of the agreement are. 

Mr. McRaith, is that possible to do? 

Mr. MCRAITH. Mr. Chairman, I am, as you know, no longer with 

the Treasury Department. I suppose anything is possible. I would 

express serious concern about that prospect. It is notable that those 

seeking clarity are also opponents of the agreement. What we see 

is the requests for clarification, particularly those from the NAIC, 

these are issues in which the NAIC directly participated. They 

were part of the conversation that generated the words on the page 

of the agreement that led to the understanding between the EU 

and the U.S. 

With respect to the industry, there were two issues I have heard: 

One, what happens 5 years from now? Well, having a second document that repeats what is in the first document does not provide 

any clarity about what happens in 5 years. The other question is 

whether the reinsurance reforms would be retroactive based on the 

word ‘‘amendment,’’ and it is basic Contract Law 101 that both parties have to agree to an amendment to a reinsurance contract. I do 

not think we need that clarification from the EU. 

Chairman CRAPO. But are you saying that the words are clear? 

Mr. MCRAITH. The agreement is clear on its face. The agreement, 

like any international agreement, may require interpretation and 

implementation clarity as things move forward. So once the agreement is signed, it is entirely natural and expected and a mechanism is established for the parties to coordinate and sort through 

any of these questions that might come up. 

Chairman CRAPO. And, Ms. McPeak, would you respond on the 

question of whether your interests were adequately represented in 

the negotiations? 

Ms. MCPEAK. Certainly. Well, we have been very instructive on 

the process, and I will say that six of us were included in the discussions, myself included, but we were not able to brief our colleagues or even consult with our individual general counsels in our 

Departments of Insurance. 

But that process aside, the actual issue is the very public agreement that we have before us today is not clear on how to implement this on behalf of State insurance regulators. We do not know 

from the terms of the agreement itself whether we can impose additional consumer protection matters that might be substantially 

the same as reinsurance collateral because that might void the 

agreement. We do not know if our capital assessment tool is going 

to be sufficient to meet the terms of the agreement. And I think 

before we go forward with model laws and processes through State 

insurance regulators and our State legislatures, we need to know 

14 

the rules of the road, and we need to know that our actions are 

going to be exactly what is contemplated in the agreement. And 

these issues should be worked out ahead of time. 

Chairman CRAPO. Thank you. Both Mr. Henderson and Mr. 

Sapnar are asking to be heard. I have got 71 seconds, so if you 

could each take about 30 seconds, I would appreciate it. 

Mr. SAPNAR. Sure. In my experience, contracts never read perfectly clear. We have a direction to go in. A bird in the hand is 

worth two in the bush, in my opinion. The joint committee is there 

to clarify or go through any issues. And we believe any delay will 

mean more lost business for U.S. companies trading abroad. 

Chairman CRAPO. Thank you. 

Mr. Henderson. 

Mr. HENDERSON. The agreement is 24 pages long, and yet there 

is no words in it that we need to see which are the words that was 

the goal in the first place: mutually recognize the two systems. The 

whole agreement could probably be a page, lawyers aside, if it simply said mutually recognizing systems, and the other problems go 

away. 

Chairman CRAPO. Well, thank you. And I think we will have an 

opportunity here to get back to this issue some more. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Three years ago, Senator Collins and Senator Johanns and I 

worked to ensure the Federal Reserve should not subject U.S. insurers to the bank-like capital framework. You may remember 

that. I would likewise be concerned—and this question is for Mr. 

McRaith. I would likewise be concerned if Europe’s bank-like Solvency II capital framework were forced upon U.S. insurers. Walk 

through with us, Mr. McRaith, the intent behind the provisions of 

the Covered Agreement that address capital rules for insurers, if 

you would. 

Mr. MCRAITH. Sure. First, Senator, I want to acknowledge the 

great leadership by you and your colleagues to address that issue 

a couple years ago. It was important and essential for the insurance industry. 

With respect to the agreement, that is the entire purpose and objective of the agreement, that in the United States our regulators 

at the State level will decide how to supervise U.S. insurance 

groups. So contrary to what I have heard from at least one witness 

today, the agreement is entirely clear that there are boundaries 

now drawn. The EU will supervise its companies at the group level 

as it determines appropriate. In the United States, through the 

States, whether capital, governance, reporting, solvency oversight, 

it is the United States and our system and structure—in your 

opening remarks, you mentioned your support for the State system. 

It is that system that will have the authority and the capacity, only 

that system that will decide how are U.S. groups to be supervised, 

including with respect to capital. That is the objective of the agreement, and that very clear distinction and bright line is articulated 

in Article 4 of the agreement. 

Senator BROWN. Thank you. 

Professor Zaring, two questions about FIO. First of all, do you 

think it serves a useful role both domestically and internationally? 

15 

And then as you explore that, if you would give us your interpretation of FIO’s authority to preempt State capital rules. 

Mr. ZARING. I think that FIO has served a critical role in making 

progress in what is increasingly a globalized insurance marketplace. And what it has done, in my view, are two very useful different things, at least two. 

For starters, it served this important coordinative function in 

creating a forum through which a consistent and commonly held 

United States approach to international negotiations can be taken. 

And that has made progress in international affairs easier and 

meant that the United States is better represented when it goes to 

these global fora and making decisions about whether it should get 

involved or not. 

It has also served a disciplining function when it monitors regulatory quality in the United States, and I think that is an independent and useful thing as well. 

One thing that FIO does not have is the power to preempt State 

insurance laws, and there is nothing in this agreement that suggests anything otherwise to me. It cannot replace capital rules. It 

cannot replace the statewide system on supervision. Indeed, it depends on that system of supervision to make the American side of 

the agreement work. 

The limited things that could happen under FIO I view more as 

a notification process. To the extent that there would be any preemption at all, it would be when a State and FIO were at loggerheads about a collateral requirement for reinsurance, an approach 

to reinsurance, and FIO then would be in a position where it would 

basically be forced to make very clear to the State that it cannot 

operate the reinsurance collateral provision that it has. And it 

would in the same way be notifying the European Union that in 

its view there is some portion of the agreement that is not being 

met. 

Senator BROWN. Thank you. 

Mr. Chairman, one motion. I ask unanimous consent to submit 

the statement of a company in my State, Cincinnati Financial, for 

the record of today’s hearing. 

Chairman CRAPO. Without objection. 

Senator BROWN. Thank you. 

Chairman CRAPO. Thank you. 

Senator Shelby. 

Senator SHELBY. Thank you. 

If the Secretary of the Treasury signs the Covered Agreement, in 

what circumstances and in what ways will Federal requirements 

preempt previously negotiated State-based insurance regulations? 

Ms. McPeak. 

Ms. MCPEAK. Thank you for the question, Senator. The preemption provisions are related to the reinsurance collateral article in 

the Covered Agreement, and so if States are unable to create a system that is compliant with the Covered Agreement, we would be 

looking at preemption of those State laws requiring reinsurance 

collateral. 

But more problematic for us is that the uncertainty in the agreement, being it is a cross-conditional agreement, if we have an issue 

with compliance, even on the group supervision or group capital 

16 

side, it could void the entire agreement, and we would be back in 

the same position that we are today. 

So we are very concerned about preemption. We want to make 

sure that as States we can comply with the provisions as intended 

in the agreement to avoid that preemption. But equally concerning 

to us is the voiding of the agreement if we do not know the rules 

to comply with the group supervision and group capital provisions. 

Senator SHELBY. Mr. Henderson, who are the winners and losers 

in this agreement? There are always winners and losers. 

Mr. HENDERSON. Absolutely. Thank you. You are absolutely correct. The losers in this case—well, let me take the winners first because that is easy. It is the EU. They got their way in the agreement—— 

Senator SHELBY. The EU wins. 

Mr. HENDERSON. And Mr. Sapnar does not have to open a local 

office like he does not want to. The losers in my mind are the 

NAIC, which is already working on its own fixing some of these 

things, and now their legs are cut out from under them. And companies like mine, if there really is a need for a group assessment, 

which is what is in the material, then my company has to look at 

capital differently. So that could raise our costs and, hence, costs 

to policyholders. 

Most concerning, which I do not hear anyone talking about at all, 

is the significance of the collateral being gone, because basically 

this agreement simply says there is no collateral. If I can give you 

a quick example, a real-life—— 

Senator SHELBY. Explain what you mean. 

Mr. HENDERSON. I will give you a real-life example. Last year— 

I have a customer called Coin-Tainer, and they actually wash coins 

and then put them in those little paper things that nobody uses 

anymore. They had a chemical fire at night, and it burned the 

place down. We paid $5 million to them to rebuild their business. 

However, I actually pay $500,000 of that. The other $4.5 million is 

split between three reinsurers, each of whom must pay me $1.5 

million so I can get back to whole. Collateral ensures that they do 

that. Without the collateral, I cannot be sure that I will get that 

money. If that happens over and over and over again, then my capital will have to go up. That causes more expense to my operation 

and the policyholders will see higher rates. 

Senator SHELBY. So that is a game changer for you. 

Mr. HENDERSON. It is. 

Senator SHELBY. And other people situated like you. 

Mr. HENDERSON. Yes, sir. 

Senator SHELBY. Historically, have the European insurance companies been better capitalized than the U.S. or vice versa? 

Mr. HENDERSON. Well, I think the real difference—— 

Senator SHELBY. Differently, isn’t it? 

Mr. HENDERSON. The real difference, sir, is in their system. So 

capital is everything to them. So as long as you have the capital, 

they really do not pay a lot of attention to anything else. Whereas, 

in the U.S. what the NAIC does as a legal entity rule, they look 

at each company individually, what are their liabilities, what are 

their assets, what does their capital have to be? I think that is a 

much more reasoned approach. So they examine us constantly. We 

17 

have seven companies in six States. All of them come and examine 

us every 3 to 5 years. They look at rates; they look at forms. They 

are doing a lot more regulatory-wise than the people system. 

Senator SHELBY. All of us are consumers. We buy different forms 

of insurance, whether individuals, businesses, professionals, and so 

forth. 

Ms. McPeak, you represent the Commissioners in the United 

States of America. We have regulated insurance at the State level 

for a long time. Do the consumers lose on this Covered Agreement, 

or who loses? 

Ms. MCPEAK. Well, the NAIC would certainly have preferred our 

model to reduce reinsurance collateral on a reasoned, step-by-step 

approach rather than a wholesale elimination of reinsurance collateral. We do not know if we can continue to require the reporting 

from the European insurers that you were just requesting information about their level of capitalization under the terms of this 

agreement. So I think our insurance consumers could lose because 

we as insurance regulators are going to be looking for another way 

to protect consumers from that reinsurance counterparty risk. And, 

again, we do not know the extent of mechanisms that might be 

available to us under the terms of this agreement as it is written. 

And so we feel like we will need to be taking measures to protect 

insurance consumers from that reinsurance counterparty risk, but 

we do not know exactly what mechanisms would be acceptable 

under this agreement, and that is why we are asking for clarification. 

Senator SHELBY. If there had been more transparency in the negotiations, could that have helped you a lot? 

Ms. MCPEAK. Well, just clarification in the language and transparency with all of our colleagues, several of our members did not 

get to see the language of this agreement until it was public, and 

so that transparency certainly would have helped throughout the 

process. 

Senator SHELBY. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman 

In my former life, I sold insurance at the regional level, and we 

did business with a lot of regional carriers who really, during the 

really tough times, they stayed with us. And some of the larger 

ones basically were not able to provide us the services that we 

needed where the regionals stuck around. So I come with that as 

a background on it. 

But I also know that they definitely need reinsurance and access 

to reinsurance markets, and it is a major part of their costs as well. 

But I was just curious, and I want to give a couple of you an opportunity to clarify just a little bit. Ms. McPeak, former Director 

McRaith has just stated that the insurance commissioners were involved in the negotiation process basically at historic and unprecedented levels. You have indicated that there was a group of you 

that were there and participated in this, and yet, Director McRaith, 

you also indicated—and I just want to let you clarify first before 

I go to Ms. McPeak—that there is always the opportunity, the need 

to look at and to review and to update after the item has been 

18 

adopted. That sounds kind of a lot like we went through here in 

2009 when certain Members here actually promoted legislation 

that they had to pass in order to find out what was in it. That did 

not go over very well, and it continues to be an item of contention 

and a reminder to all of us. 

Can you clarify a little bit about what you meant by that in 

terms of—you really did not mean sign it and then find out what 

is in it? 

Mr. MCRAITH. Senator—— 

Senator ROUNDS. Or did you? 

Mr. MCRAITH. No. We created an unprecedented historic mechanism to include officials appointed by Governors in most States in 

the negotiating delegation for an international agreement. These 

are individuals—and I was one, so I have great respect and affection for Julie and her colleagues and the work they do. But these 

are not—we were not policymakers at the State level. But we included the regulators in the negotiating delegation out of respect 

for and appreciation for and support for the role and primacy of the 

State regulators in oversight of insurance in the United States. 

Now, my point is—— 

Senator ROUNDS. So you feel like you went above and beyond 

what would have been required. 

Mr. MCRAITH. Far beyond what has ever happened in the history 

of our country. In addition, to answer your second question, the 

agreement is clear. But as any international agreement which covers, you know, thousands of potential fact patterns, there will be 

idiosyncratic questions that come up. Julie has raised a couple; 

Stuart, Mr. Henderson, raised a couple. These are things that can 

be addressed after the agreement is signed. To do that now imperils and would likely kill the entire arrangement. 

Senator ROUNDS. It is interesting because it seems to me that if 

it might kill the entire arrangement, it would seem to be a pretty 

significant idiosyncratic question or comment. 

May I go to Ms. McPeak just to follow up? 

Ms. MCPEAK. I would agree with your comments. If the testimony by Mr. McRaith is, in fact, what has been intended by the 

parties all along, confirmation of that fact by current Treasury Department officials and the European Commission would not seem 

to be that difficult and would, in fact, be prudent and reasonable. 

If that is going to potentially damage the agreement in itself, it 

would indicate to me and to my colleagues as insurance regulators 

that perhaps we did not have a meeting of the minds to begin with. 

We are just asking for clarification before we begin implementation 

of this agreement. 

Senator ROUNDS. Yes, sir, Mr. Henderson. 

Mr. HENDERSON. It just occurs to me listening to this, naturally 

that is unprecedented and historic because it is the only one that 

has ever been done. So that adjective does not really mean much. 

I believe that Mr. McRaith is an honorable man and he really 

thinks that is what it says. But when there are so many other honorable men and women who read it and do not think that is what 

it says, that is an ambiguity, and that is what has got to be clarified. 

Senator ROUNDS. Yes, sir? 

19 

Mr. SAPNAR. As we heard, it took 10 years to get to this point, 

and as people change, we would not necessarily have the same people at the table. If you go back to discuss for clarification, there is 

a process set forth clearly in the agreement to resolve anything 

that people need more clarity on. I do not think there is a lot—in 

our opinion, it is a clear document. 

Senator ROUNDS. You know, I am just going to go back here because it is exactly the follow-up that I wanted to do on Mr. 

McRaith, and I would like to come back just for a second. Could 

you tell me who will be representing the United States on the joint 

committee? It seems that there is a possibility—would State insurance commissioners be included in the joint committee? 

Mr. MCRAITH. It is an excellent question, and we did not flesh 

out all the details of the joint committee in the agreement, but 

we—— 

Senator ROUNDS. It seems like that would be a pretty important 

one to find out. 

Mr. MCRAITH. Well, we would absolutely—I would suggest and 

have said publicly other places that absolutely State regulators 

should be involved. Now, there is a question—— 

Senator ROUNDS. But it does not state in the joint committee 

who would be on it? 

Mr. MCRAITH. But we also did not spell out what is a quorum. 

We did not spell out where the meetings should occur. We did not 

spell out whether there should be minutes maintained, whether 

there are votes on items. We did not spell out any of those things. 

But these are entirely natural, organic questions that we would expect to be answered reasonably, Senator, and as you would expect, 

in a conversation like this where the State regulators were included in the negotiating and drafting, we would, of course—I 

would expect they would be included in a joint committee. The 

question is which State commissioner. If it is an issue involved 

South Dakota, we would hope for the South Dakota commissioner. 

If it is an issue involving national policy, say, on reinsurance, we 

would want the representative from the States who leads their reinsurance work. If it involves a New York company or an Idaho 

company, we would want the Idaho or New York commissioner involved. 

Senator ROUNDS. Thank you. 

Mr. Chairman, my time has expired. Thank you. 

Chairman CRAPO. Thank you. 

Senator BROWN. Mr. Chairman? 

Chairman CRAPO. Yes? 

Senator BROWN. Yes, thank you. Before Senator Warren asks her 

questions, I have just one interjection. As has been established, the 

comment of Senator Rounds about Speaker Pelosi’s comments 

about reading the health care bill have been proven as simply—has 

been taken out of context. No legislative leader would say, ‘‘I have 

got to find out what is in the bill. I have got to read it now that 

we have passed it,’’ or however it is interpreted that she said it. 

The fact is there are 900,000 people in my State that have insurance now that did not have it before the Affordable Care Act, and 

I do not know why this place needs to continue to relitigate that, 

that the House is struggling, and nobody is reading any of those 

20 

bills because they come so fast and furious. So let us just stick to 

what this issue is. 

Thank you. 

Senator ROUNDS. Well, Mr. Chairman, if I could respond. It is 

not intended to be derogatory. It is simply a matter that it is one 

thing that we most certainly do not want to have happen in here. 

Most of us, I think, we do not pass things to find out what is in—— 

Senator BROWN. Well, her comments were taken out of context, 

and we all know that, and it has been established. Let us focus 

on—— 

Senator ROUNDS. I thought they were pretty clear. 

Senator BROWN. All right. 

Chairman CRAPO. OK. So the debate on Obamacare will now return to—— 

[Laughter.] 

Chairman CRAPO. ——covered agreements. Senator Warren. 

Senator WARREN. All right. I am ready to rock and roll on this. 

So thank you, Mr. Chairman, I appreciate it. And thanks to you 

and the Ranking Member for holding this hearing. 

So I have taken a look at the written testimony of all of the witnesses. I am very glad you are here today to talk about this. There 

are obviously a number of technical but important issues at stake 

in this agreement. But for me, this boils down to a pretty basic 

question. What will it mean for Americans who buy insurance, both 

individuals and companies, if this Covered Agreement is adopted 

and implemented? Or, on the flip side, what will it mean for policyholders if this agreement is abandoned? 

I recognize that changing reinsurance collateral standards will 

not have a direct impact on policyholders, but I want to understand 

what the secondary effects might be. 

Now, Mr. McRaith, you were the lead negotiator on this, so I 

thought maybe I would just start with you and then hear from everyone else. What is the ultimate policyholder impact here as you 

see it? 

Mr. MCRAITH. Very clearly, U.S. companies that operate both in 

the EU and the U.S., primary insurers, people selling car insurance, home insurance, those companies will not have to add billions 

of dollars potentially in capital and compliance costs because of the 

EU regime. They will be able to use that capital to keep rates affordable, to offer better products to people on the coasts and elsewhere. They will be able to invest that capital in growth in other 

developing economies potentially or in new markets in the United 

States. 

Senator WARREN. So you are basically saying a lower cost for insurers, and in a perfect market what that will mean is passedalong benefits to customers who either can buy at lower rates because there is more competition in the marketplace. Is that—— 

Mr. MCRAITH. That is a potential benefit to U.S. consumers, exactly. 

Senator WARREN. OK. And downsides to consumers? 

Mr. MCRAITH. So I have heard this concern about collateral, and 

I think some facts are important which we have not heard yet. As 

Commissioner McPeak mentioned, 39 States have adopted reinsurance collateral reform at the State level. That is fantastic progress. 

21 

This is going to become an accreditation standard in 2019, meaning 

every State has to adopt it. 

When we surveyed the companies that have received relief under 

that reform, there were 31 published by the NAIC; 30 of those are 

posting 10 or 20 percent of the collateral they posted several years 

ago, so—— 

Senator WARREN. OK. And have prices—— 

Mr. MCRAITH. So it is not going from 100 to—— 

Senator WARREN. Have prices gone down for their customers? 

Mr. MCRAITH. That is right, so it improves the—whether it affects consumers directly, as you know, there is the chain, reinsurer, 

insurer, consumer. 

Senator WARREN. So there is no data yet to show that prices actually dropped? 

Mr. MCRAITH. I think Mr. Sapnar could probably answer that 

question better than I. 

Senator WARREN. OK. Ms. McPeak—— 

Mr. MCRAITH. But that would be the expectation. 

Senator WARREN. OK, the expectation but no data. 

Mr. MCRAITH. That is right. 

Senator WARREN. Ms. McPeak. 

Ms. MCPEAK. Thank you. I would disagree with my colleague Mr. 

McRaith. I would say that our States and our colleagues that have 

adopted the Credit for Reinsurance Model Act have reduced collateral requirements to 10 to 20 percent. This agreement is a wholesale removal of reinsurance collateral. We as regulators are going 

to be looking for consumer protection benefits through that 

counterparty reinsurance risk, and we will be trying to create other 

mechanisms to protect insurance consumers and our domestic companies that are purchasing reinsurance and no longer have collateral available. 

The uncertainty surrounding the ambiguity in this agreement 

and what mechanisms will be available to us that are jurisdictionally agnostic add uncertainty to the market, and I think that increases prices to consumers. 

Senator WARREN. OK. So you just say higher uncertainty, prices 

go up. All right. 

Mr. Sapnar. 

Mr. SAPNAR. Well, the trend of pricing for consumers over the 

last 5 years by almost any line of business in the United States has 

been favorable. It has been what we call a softening market, price 

declines, to the point where, in fact, they were not even covering 

lost costs in the automobile industry, which is now having an issue 

on the insurance side because the pricing was so cheap. 

As far as collateral is concerned, nothing prevents people from 

still requesting collateral. It is just not regulatory mandated. There 

are hundreds of companies that post collateral without regulation, 

including my own. 

Senator WARREN. I understand that. The question I am trying to 

ask is: If this were adopted or abandoned, what do you see is the 

likely impact on the ultimate user, the policyholder? 

Mr. SAPNAR. The other issue as collectibles, we would be—if it 

is not adopted and we want to trade in the EU, we would move 

capital outside the United States. That capital would be available 

22 

first to EU policyholders before U.S. policyholders. So that is a disadvantage to U.S. policyholders who would be second in line to access that capital. 

Senator WARREN. So you are saying that you think if we abandon 

this, it means higher risk for U.S. policyholders. 

Mr. SAPNAR. Higher risk—— 

Senator WARREN. Because there will be less capital for them to 

draw on if there is a problem. 

Mr. SAPNAR. In the United States, that is correct. 

Senator WARREN. All right. I know I am over. Can I have just 

a little bit longer? 

Chairman CRAPO. A little. 

Senator WARREN. Just a little bit. So the last two, you have got 

to be short. I am out of time. Mr. Henderson? And the Chair is 

being very indulgent. 

Mr. HENDERSON. Great question. So reinsurers get less costs because no offices, they do not have to have the collateral there. I can 

tell you that pricing will not go down. It is an all-time low today, 

and their capital is an all-time high. This is a recipe for low pricing. It is not going to change. So that cost to me will not go down. 

That is a cost that is passed on to the policyholder. 

The regulator in the U.S., I have just heard, which scares the 

heck out of me, that they are saying, well, if collateral is gone, then 

we are going to have to carry more capital, because now we cannot 

rely on their collateral to pay it; we have got to put up our own. 

If that is the case, costs will go up, direct to the consumer. 

If it is abandoned—your next question, if it is abandoned, then 

reinsurers, the only thing that we will really get is reinsurers are 

going to have to open an office in the EU. He is going to pay more 

money for it. He is not going to be happy about it. But, again, 

prices an all-time low, capital is an all-time high, there is going to 

be no increase in reinsurance pricing. We will find out when I negotiate; I go to London tomorrow where more of this business is 

done. No one is talking higher prices. 

Senator WARREN. OK. And, Mr. Zaring, if you could do this really 

quickly. 

Mr. ZARING. I will just say very briefly that, look, this agreement 

increases competition in the reinsurance market, and I really hope 

and expect that it will be eventually and ultimately good for consumers. 

And, second, there is nothing in this agreement that changes the 

traditional focus of State regulators on consumer protection. This 

does not touch it, and so I expect that consumer protection mission 

will continue unchanged. 

Senator WARREN. OK. I very much appreciate it. Thank you, Mr. 

Chairman. You know, I think if we are thinking about signing on 

to an international agreement like this, this is the question we 

should dig down in. And I am a little disturbed about the fact that 

we do not have some good data based analogs that we can see how, 

when you make changes, it affects prices one way or the other. 

Chairman CRAPO. I agree. 

Senator WARREN. But thank you very much. I appreciate it, Mr. 

Chairman. 

Chairman CRAPO. Thank you. 

23 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. And thank you for, A, 

holding this important hearing; B, having a unique panel with very 

varied opinions that are very clear and stark; and, C, having spent 

about 23 years in the insurance business, I am a fan of the State 

model. Without any question I think it is the best model we have 

seen, and it has been successful for a very long time for a couple 

of very important reasons. 

At the same time, I know that as we engage in an international 

conversation about insurance regulations and norms, it is important for us to look for that equilibrium that we—obviously, I do not 

think we have found it today, as I listen to the hearing, but I do 

have a couple of questions about who is in the room and who is 

at the table. So being in the room is one question that you guys 

have done a pretty good job of answering. NAIC, in the room, without staff, without general counsel, without the experts that could 

help you understand and appreciate the direction of the agreement. 

I heard Senator Rounds talk about the—I will not say the words 

because I do not want to upset Senator Brown. I will not say we 

have to pass it in order to know what is in it and then create 

30,000 pages of regulations to get that clarity. I will not say that. 

But I will suggest, however, that it feels like the certainty and the 

clarity is not there yet. The negotiations, as I was listening to it 

in my office, seems to suggest that the negotiations themselves will 

help us get that clarity because, after all, that is what you do after 

an agreement is signed. Well, I would hope that is what you do before the agreement is signed, just personally. 

But the question I have, not about being in the room or being 

at the table, my question is, Ms. McPeak, do you have any confidence that the NAIC will be not a part of the conversation but 

at the table represented in a way that preserves what I believe is 

the best insurance model in the world? 

Ms. MCPEAK. Well, I think it is important to say we do not know. 

Based on the plain language of this agreement, it is unclear who 

will be serving on that joint committee to resolve these very important issues. My colleagues and I are willing to implement the terms 

of this agreement to solve this problem, again, not of our making, 

but we just need to know the rules of the road. We need to know 

that the blueprint for our house that we are building will actually 

suffice under the terms of this agreement. If not, then there is 

going to be some kind of resolution through a joint committee that 

we may not even be able to participate in. 

Senator SCOTT. A second question for you, and then we will work 

around the panel. It is my understanding that permanent equivalence was granted to companies based in the Bahamas and Switzerland but not in the U.S. Is that accurate, Ms. McPeak? And 

then everyone can chime in. 

Ms. MCPEAK. That is accurate. Bermuda and Switzerland went 

through an equivalence process through Solvency II that was specified, and the United States has chosen not to participate in that 

determination. It was going to require changes to our financial regulatory system that we were not willing to undertake. 

I think that it is a bit absurd that the two most sophisticated insurance markets in the world have to undergo some equivalence 

24 

process, again, under the creation of the European Commission’s 

direction in Solvency II. 

Senator SCOTT. Anyone else want to weigh in? Mr. Sapnar. 

Mr. SAPNAR. Well, what this agreement does is actually formally 

recognize the U.S. State regulatory system as a strong and robust 

system for the first time ever. There are no requirements for the 

States to change the regulation whatsoever. So I think that is a 

great outcome for that, and that will set the standard as other 

global negotiations go on on accounting standards and other capital 

standards. The recognition of the U.S. system is clear in this agreement, and that is very important. 

Senator SCOTT. Mr. Henderson. 

Mr. HENDERSON. Well, I guess if it was really clear, you would 

not have Julie Mix McPeak saying it is not. I think that sort of 

speaks for itself. 

Mr. MCRAITH. I think, Senator, if—oh, I am sorry. 

Senator SCOTT. Mr. McRaith. 

Mr. MCRAITH. Just very clearly and briefly, as a State commissioner I testified in front of this Committee and others expressing 

our opposition undergoing an equivalence process. When we started 

the negotiations, our focus was: How will U.S. industry be treated? 

How will the U.S. system be recognized? So we did not want to use 

the term ‘‘equivalence.’’ That is an EU term. Nobody quite knows 

entirely what it means. We in the agreement negotiated terms that 

are clear about how the U.S. system is recognized and respected 

and how the U.S. will supervise its companies as it deems appropriate. 

Senator SCOTT. Mr. Zaring. 

Mr. ZARING. In my view, the agreement does not require the Solvency II process to go ahead, but resolves most of the problems 

posed by imposing a Solvency II type regime on American insurers. 

So in that sense, it is better than a Solvency II equivalence demonstration. 

I also just wanted to say that I have reviewed this agreement, 

and I look at these international regulatory cooperative agreements 

on occasion, and they can be very, very short and terse. This is 

longer than the first Basel Capital Accord, longer than the Memorandum of Understanding the SEC has with its foreign counterparts. I think there is a level of detail here that is appropriate, and 

when it comes to international regulatory cooperation, we do not 

necessarily want or expect something like a trade treaty or a 1,000- 

page bill or something like that. So I think that is important to remember. 

Senator SCOTT. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chairman. Thank you all for 

being here. 

Mr. Henderson and Ms. McPeak, you all have—well, actually, I 

think Mr. Henderson first, you were talking about how this would 

have an impact on premiums. I think Mr. Zaring said that hopefully this would result in a positive impact. So one thinks that 

there is some optimism in this agreement that will get us to a positive outcome. The other one who sits on top of an insurance comVerDate Nov 24 2008 13:33 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2017\05-02 ZZDISTILLER\50217.TXT JASON
25 

pany as the CEO says it is going to raise premiums. Can you help 

me reconcile that or give your basis for that? 

Mr. HENDERSON. Well, no disrespect to Mr. Zaring, but he studies the stuff. I live it, and I know how the pricing works and all 

the pieces of it. We are a mutual company, so we do not have stockholders. It is pretty much we serve our policyholders. We try to 

keep the prices reasonable, not make too much money and all that 

stuff. And there is nothing I see in here that is going to cause us 

anything but higher costs, most particularly because of the capital 

which is going to be required because of no collateral. 

Senator TILLIS. Mr. Sapnar. 

Mr. SAPNAR. With due respect, I think I was the one who said 

there would be benefits, and I am a CEO of a reinsurance company. And I would say that when you have collateral, you tie it up. 

You cannot sell that same capacity again. So, by definition, you 

have limited capacity and, therefore, prices could go up. By releasing collateral, there is more ability to sell to the client. 

Second, again, without this agreement, companies will be forced 

to move capital outside the U.S. You may not see the cost tomorrow, but when the failure comes or a financial crisis comes and 

that capital is not in the U.S., you will see the cost. And that is 

a big and dear cost to pay as opposed to incremental costs on a 

daily basis. 

Senator TILLIS. Ms McPeak, can you tell me a little—well, actually, I have maybe a question that I want you and Mr. McRaith to 

respond to. Mr. McRaith, you said that the joint committee, the 

governance structure is something that needs to be worked out 

over time. I would think the stakeholders that are on the other side 

of the issue—I was in the legislature down in North Carolina for 

8 years. Governance structures baked into the base of legislation 

tended to be the way to get the parties on board because they felt 

like they had a fair venue for working out differences or clarifying 

the ambiguities. 

What would be wrong with consideration for that as a way to address some of the concerns that have been expressed here? 

Mr. MCRAITH. I completely—— 

Senator TILLIS. Just time or—— 

Mr. MCRAITH. Look, I think you are absolutely right that the 

issue, though, of who attends and participates depends on the underlying issue itself. So, again, I think what the agreement shows 

and demonstrates is a commitment to include State regulators as 

appropriate in the U.S. system, again, completely unprecedented in 

American history. But, second, which commissioner would depend 

on the issue. It might involve an issue the North Carolina commissioner should participate in. Why would we want a commissioner 

from Oregon instead? So that kind of flexibility is necessary for the 

joint committee. 

Senator TILLIS. Ms. McPeak, I want you to respond to that, but 

also talk a little bit about how this would affect Tennessee. By the 

way, I have got a brother in the State House there. He just started 

back in January. But if you were to take the agreement as it is proposed, what do you do? What goes on in Tennessee? How does it 

affect the consumer or the business in Tennessee? 

26 

Ms. MCPEAK. Well, that is the issue that I would like to reiterate 

today. You know, Mr. McRaith is talking about one insurance regulator on the joint committee. Why does it have to be one? Why 

couldn’t it be a group of three? The problem is we just do not know. 

And I am saying, with all due respect to the rest of our panelists 

here, my colleagues and I are tasked with implementing this agreement. We are the only ones at the table that will have that responsibility. We do not know how to comply with some of the provisions 

that we have provided to this Committee in a list of issues that 

need clarification. 

Further, we do not know that we have one or maybe even two 

or three seats on this joint committee to be named later. That is 

an issue for us because as we have recognized, there is a very real 

problem with disparate treatment of our companies in the European Union, and if we do something incorrect or not conceived as 

part of this agreement, we could void the entire agreement because 

of the cross-conditional issues in the agreement itself. And so we 

could be back right here today with these exact same issues just 

because we did not have clarification before we started building a 

process to implement these requirements under the agreement. 

As for actions in Tennessee, we have already passed in Tennessee the Credit for Reinsurance Model Act adopted by the NAIC 

in 2011. So for me, we would begin working as insurance regulators across the Nation to come up with consumer protection requirements, put those into a model act to be adopted by the National Association of Insurance Commissioners and take those to 

our individual State legislatures and Governors for adoption, and 

keep in mind, when 39 of us have already been there asking for 

our own model for reinsurance collateral reduction in the last several years or so. 

So, you know, we need to be very clear that whatever product we 

come forward with to implement this agreement is going to be sufficient under the consideration of the agreement itself. 

Senator TILLIS. Thank you. 

Thank you, Mr. Chair. 

Chairman CRAPO. Thank you very much. That concludes the Senators who have sought to ask questions. I am going to ask one 

more question before we wrap up and then make a general request 

to all of the witnesses to respond in writing to another question. 

As a matter of fact, Senators can submit questions to you after 

the hearing is concluded, and we encourage you to respond within 

1 week of the receipt of those questions, and I will tell the Senators 

we expect those questions to be submitted within 2 days. 

The question I have is just for Mr. McRaith and Ms. McPeak, 

and these can be very brief answers. I just want to try to see if I 

am understanding this accurately. In Article 4 of the agreement, 

group supervision by the host jurisdiction is not authorized at the 

worldwide parent level. However, Article 4(h) allows the host to 

apply a group capital assessment at the worldwide parent level if 

the home jurisdiction does not have a sufficient group capital assessment. 

Now, Mr. McRaith, first, is it your belief that the States are adequately protected under this clause? 

27 

Mr. MCRAITH. Absolutely. Let me be clear. Article 4(h) says— 

clarifies. The States have been working on a group capital calculation for over 2 years now. What the agreement says is for those 

companies that operate in the EU and the U.S.—not Mr. Henderson’s company, but those that are operating in those two jurisdictions, the States have an additional 5 years to develop their group 

capital calculation, and it does not prescribe the manner, the content, the specifications of that calculation, period. 

Chairman CRAPO. All right. And, Ms. McPeak. 

Ms. MCPEAK. I would completely disagree. The language that 

you read from Article 4 that talks about group supervision causes 

us concern that we may not be able to require and request the financial information that we are currently allowed to collect on European companies under State law today. 

Further, we do not know whether our group capital assessment 

tool that we are working on will be sufficient under Article 4 to 

meet the terms of the agreement because we are looking at the assessment as one regulatory tool, and we have a lot of other regulatory authority to step in; if we saw an issue of capital that we 

could require many different courses of action other than adding 

additional capital to the company. We believe that the pure text of 

the agreement would indicate that we can have the capital assessment or there must be some capital assessment that goes on, but 

the solution for that is more capital, and we do not think that that 

is always the answer. 

Again, it is an ambiguity that we just need clarification on before 

we begin the process. 

Chairman CRAPO. All right, and thank you. I want to thank all 

the witnesses for bringing your expertise to us and helping us to 

understand this issue better. 

The question that I would like to submit to you that I would like 

you to respond to in writing is really the first one that I asked. 

There is obviously some disagreement about whether there is sufficient clarity, and that raises the question of can we resolve this 

disagreement without reopening the agreement. Can these issues 

be resolved through some type of joint letters of understanding or 

clarification? Or will that undo or require reopening of the agreement? I would just like all five of the witnesses to just respond to 

us on that question if you would. 

And, with that, again, I want to thank our witnesses. You have 

all been very helpful today. Recently, we have heard from many industry participants and stakeholders about a provision in Dodd– 

Frank regarding how the independent insurance expert to the Financial Stability Oversight Council will serve once his term expires. This is an important role on FSOC given the Council’s authority to designate nonbanks. Mr. Woodall’s term expires in September, and the statute is unclear on the holdover structure. I 

think there is an issue that Ranking Member Brown and I can 

work on in a bipartisan manner to provide additional clarity. I just 

wanted to announce that we intended to do so. 

Senator BROWN. And we will certainly work with you. Thank 

you. 

Chairman CRAPO. All right. Thank you very much. 

28 

With that, this hearing is adjourned. And, again, thank you very 

much to all of our witnesses. 

Senator BROWN. Thank you all. 

[Whereupon, at 11:20 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 

29 

PREPARED STATEMENT OF MICHAEL T. MCRAITH 

FORMER DIRECTOR, FEDERAL INSURANCE OFFICE, DEPARTMENT OF THE TREASURY

MAY 2, 2017 

Chairman Crapo, Ranking Member Brown, Members of the Committee, thank you 

for inviting me to testify in this hearing ‘‘Examining 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 (FIO) at the U.S. Department of the 

Treasury from 2011 until January 20, 2017. 

While serving as the FIO 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). 

The Covered Agreement will open the entire European Union (EU) reinsurance 

market to U.S. reinsurers, spare U.S. industry potentially billions of dollars in compliance costs, and embrace the U.S. State regulatory approach to insurance group 

supervision. 

I first testified before Congress 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 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 multinational 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 all aspects of the insurance industry to 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. 

Insurance is a necessary component of America’s promise of economic fairness and 

opportunity. Competitive insurance markets benefit America’s 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 

support a financially secure retirement. 

Indeed, FIO’s Covered Agreement 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 EU. 

On February 16, 2017, the U.S. House of Representatives Committee on Financial 

Services held a hearing entitled ‘‘Assessing the U.S.–EU Covered Agreement’’. 

Annex A to this written testimony contains replies to Questions for the Record that 

followed that hearing. In particular, the reply to the first QFR provides a paragraph-by-paragraph description of the legal benefits of the Covered Agreement for 

the United States. 

To highlight a few key points: 

1. ‘‘Equivalence’’, as defined by the EU, would require the United States to implement a global group capital requirement. The Covered Agreement will preserve 

the independence of the U.S. approach to insurance group supervision. 

2. Reinsurance collateral reforms, drawn from the approach that State insurance 

regulators have adopted as a requirement for every State, do not have retroactive effect and cannot change existing reinsurance agreements. 

3. The entire Covered Agreement is cross-conditional. Both the United States and 

the EU must provide the benefits in order to receive the benefits. Any unilateral action adverse to the other could result in the loss of the benefits of the 

Covered Agreement. 

Background 

The prudential insurance matters addressed 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. 

30 

However, despite energetic efforts by 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 establish reinsurance 

reforms as an NAIC accreditation standard, effective January 1, 2019. By virtue of 

this NAIC decision, all States must adopt a law or regulation substantially similar 

to the NAIC model law and regulation by January 1, 2019. 

While the NAIC spent years working through alternative approaches to reforms 

of State-based credit for reinsurance laws, the EU spent years developing its Solvency II insurance supervisory regime. Solvency II was first previewed and 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 stakeholders, 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. 

Among other reasons, Solvency II and its supervisory approach matter to the 

United States because, in terms of premium volume, the EU’s consolidated insurance market is the largest in the world. Also, EU insurers and reinsurers operating 

in the United States provide insurance and annuity products to millions of American families and businesses, employ tens of thousands of Americans in States 

around our country, and provide essential capital following a disaster, including 9/ 

11, Hurricanes Katrina, Rita, and Wilma, and Superstorm Sandy. 

As the world’s largest single Nation insurance market, U.S. insurance authorities 

have repeatedly refused submission 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. The 

Covered Agreement affirms this independence. 

Nevertheless, U.S. insurance stakeholders have 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 capita l, reporting and governance criteria that are 

far different, and far more costly, than current U.S. regulatory practices. 

As the EU moved to implement Solvency II on January 1, 2016, U.S. insurance 

stakeholders learned more about the potential negative impact on U.S. reinsurers 

and insurers. At the same time, U.S. State insurance regulators continued the massive (albeit piecemeal) effort to reform reinsurance oversight. Nevertheless, in exchange for this reform, State regulators received nothing of benefit for U.S.-based 

insurers and reinsurers operating in the EU. Nothing. 

Following often 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 an equally meaningful outcome for the EU, the Covered Agreement puts America’s interests first. U.S. insurance consumers, industry and the 

U.S. national economy will benefit from 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. However, 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. 

31 

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 solely for purposes of sharing confidential Covered Agreement documents with the State regulator task force, State 

regulators received all documents offered by the EU shortly after those documents 

were received by Treasury and USTR. 

Through the same confidential web portal, State regulator s 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 State regulator feedback and insight, and to ask questions. These 

telephone calls frequently resulted in 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 Tennessee Commissioner McPeak and her colleagues from California, 

Texas, Missouri, Florida, Vermont, Wisconsin, Kentucky, Maine, and Montana for 

their constructive input and insights provided throughout the Covered Agreement 

negotiation. 

U.S. State regulators made important contributions that improved the outcome of 

the Covered Agreement. These regulators, including Commissioner McPeak, 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 insurance 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 

Treasury and USTR’s work throughout the Covered Agreement negotiating process. 

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 

reinsurance markets and, in turn, promote the affordability and accessibility of insurance products to working families and small businesses throughout the United 

States. 

The Covered Agreement supports the U.S. State-based initiative to reform reinsurance regulation. In fact, the 32 U.S. States that have already adopted reinsurance collateral reform have, as of early 2017, provided collateral relief to 31 nonU.S. reinsurance entities. Of those 31, 30 now hold 10 percent or 20 percent of the 

collateral required under prior State laws. 

The State regulators’ adoption of reinsurance collateral reform as an accreditation 

standard, effective January 1, 2019, means that all States would be expected to 

adopt a substantially similar reform by that date. In other words, within the next 

2 years, as a matter of State law, every non-U.S. reinsurer could be posting as little 

as 10 percent–20 percent of the collateral formerly required by the States. 

If domiciled in a non-equivalent country, a reinsurer operating in the EU could 

be subject to EU member State laws that require collateral, a local presence, or 

other prohibitive regulatory requirements. Beginning in mid-2016, U.S. reinsurers 

were losing existing EU clients and missing new opportunities in the EU. Before 

the Covered Agreement was provided to Congress on January 13, 2017, U.S. reinsurers were experiencing this burden in full force: at least two EU member States, 

32 

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. 

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. The Covered Agreement eliminates excessive reinsurance regulation in the 

United States and the EU, and establishes a new global paradigm for oversight of 

this essential global industry. 

If the Covered Agreement conditions are met, current collateral requirements for 

EU-based reinsurers will be eliminated within 60 months from the date the Covered 

Agreement enters into force or, perhaps, as early as mid-2023. States, therefore, 

have sufficient time beyond the NAIC’ s existing plan for accreditation (January 1, 

2019) to conform all State law and regulation to the terms of the Covered Agreement. 

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 2 years from the date of signature. Due to the success of 

the Covered Agreement negotiations, EU member States that were imposing local 

presence requirements on U.S. reinsurers are already forbearing from enforcement 

of local presence requirements. 

By combining meaningful reporting requirements 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 could be required to report to the ceding insurer’ s supervisor semi-annually with an updated list of all disputed and overdue reinsurance claims that have 

been 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 nondomestic 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 provide the benefits. 

Group Supervision—Mutual Respect Finalized 

In Article 4, the Covered Agreement describes insurance group supervision practices in a manner that accommodates the distinctly different approaches of both the 

United States and the EU. Annex A includes a description of the legal benefits of 

each paragraph of the Covered Agreement, including Article 4. 

Notably, the group supervision practices of the Covered Agreement (Article 4) 

apply only to those insurers operating in both the EU and the United States. 

For purposes of defining the scope of the group, the Covered Agreement retains 

flexibility for the United States and the EU to move forward as each deems appropriate. The scope of the group is understood to be consistent with Insurance Core 

Principle (ICP) 23 developed by the International Association of Insurance Supervisors and in effect in early 2017. 

Through the Covered Agreement, the EU and the United States agree that supervisors of the jurisdiction in which the insurer (or reinsurer) is domiciled are the only 

supervisors with authority to supervise the insurers at the global group level. 

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 regulatory 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 system of inVerDate Nov 24 2008 13:33 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00036 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\05-02 ZZDISTILLER\50217.TXT JASON
33 

surer reporting that, while different from the U.S. State approach, is based on ideas 

as originated in the United States. 

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 that 

a common group capital standard for multinational insurers will allow for nondomestic 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 be 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. To repeat for clarity, the 

Covered Agreement only requires that U.S. State regulators proceed with group capital work already underway through the NAIC and does not specify how that work 

should proceed or conclude. 

To be abundantly clear, the Covered Agreement will 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. Although different from the U.S. approach, Solvency II has formed the 

basis for insurance regulatory reforms around the world, including in Mexico, South 

Africa, Bermuda, Brazil, and China. 

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 and regulation also applies to EU insurers operating in the U.S. market, the limitation on the 

application of Solvency II saves U.S. insurers potentially billions of dollars in additional compliance costs. 

The Covered Agreement 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 provides U.S. insurers operating in the EU with the strategic flexibility necessary for continued domestic and global growth. 

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 the United States. 

The Covered Agreement Resolves Reinsurance and Group Supervision 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 compliance by supervisors in both the EU and the United States. 

The Covered Agreement need not be clarified with further written materials. The 

Covered Agreement terms, painstakingly negotiated, are abundantly clear even if 

not written to resolve every stakeholder’s nuanced fantasies. 

For example, if a stakeholder were to complain about the uncertainty of 5 years 

hence, one might ask that stakeholder to explain whether that same question can 

be raised about every agreement or, for that matter, every facet of life, or, in fact, 

34 

any subsequent written material that stakeholder may claim to be essential. For 

this reason, the cross-conditional nature of the Covered Agreement allows for the 

United States to provide the benefits of the Covered Agreement only insofar as the 

EU also provides the benefits. Both sides are disciplined into compliance with the 

Covered Agreement. 

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 ambiguity. 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. 

Finally, if both the EU and the United States have complied with the Covered 

Agreement conditions, then the terms of the Covered Agreement become permanent 

and final. See Article 10, paragraph 1. 

Federal Insurance Office 

After the devastation wrought by the financial crisis, Title V of the Dodd–Frank 

Consumer Protection and Wall Street Reform Act established FIO to complement 

the work of the States with respect to the U.S. insurance regulatory system. Among 

other authorities, FIO has statutory authority to represent the United States on 

prudential aspects of international matters. In doing so, FIO has worked closely 

with the insurance professionals at the Board of Governors of the Federal Reserve 

System, State regulators, and staff at the NAIC. In addition, working with our 

international counterparts, FIO supported international consensus that accommodates the substance and structure of the U.S. insurance regulatory system. 

Make no mistake—U.S. leadership in the global insurance sector is more important now than ever before. Developing economies around the world seek private capital and insurance products to provide the same benefits to their populations that 

the industry provides to families and businesses in the United States. 

Where 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. 

The U.S. insurance industry, in all of its diversity, deserves prominent U.S. Federal leadership on important global insurance matters. For those who would argue 

that only a State (which State?) should have this role, the actual salient question 

is whether the United States prefers to lead or to follow. 

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 U.S. 

insurance sector deserves a heightened prominence in the U.S. Department of the 

Treasury. Recent proposals, including by the Bipartisan Policy Council, affirm the 

increasing awareness of the U.S. insurance sector’s national and global importance. 

Industry and consumers have a shared interest in efficient, well-regulated and 

competitive markets. FIO has published 16 reports, including on topics relating to 

insurance consumer matters and the development of an affordability index of personal auto insurance. This work highlights the State-by-State differences and the 

impact of those differences on the insurance industry and the American people. 

FIO has engaged domestically in, or led U.S. engagement in, a broad range of 

matters, including retirement security, resilience to severe weather events, cybersecurity, 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. This engagement has assured that insurance matters of 

national interest and concern are identified, recognized, understood, and appreciated 

at the highest levels of the Federal Government. 

As one of the most highly regulated and quickly evolving financial services, the 

U.S. insurance sector—consumers and industry—deserves strong national and global representation and leadership. Federal leadership, including through Congress, 

will be increasingly necessary to address important insurance issues of national 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. While providing equally meaningful benefits 

for the EU, this Covered Agreement achieves all objectives sought by the United 

States. 

35 

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. 

Chairman Crapo, Ranking Member Brown, thank you for the opportunity to speak 

with you today. I look forward to your questions. 

36 


50217001.eps

ANNEX A 

McRaith Replies to Questions for the Record 

U.S. House Financial Services Committee 

Subcommittee on Housing and Insurance 

"Assessing the U.S. - EU Covered Agreement" 

February 16, 2017 
37 


50217002.eps

Chairman Duffy 

U.S. House of Representatives Financial Services Commmee 

Hearing: ''Assessing the U.S. EU Covered Agreement" 

February 16.2017 

Michael T. McRaith 

Replies 10 Questions for the Record 

Question ~umber One 

Tite Covered Agreement (Agreement) opened the entire EU reinsurance market to U.S. 

remsurers. spared U.S. industry operating in the EU potentially billions of dollars in 

compliance costs. and embmced 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 bcncfiL~ ar.: not mutually exclusive in that a positive 

outcome for EU industry stakeholders can also benefit U.S. intcrcsl:\. 

EU insurers and reinsurers insure millions of American families and busines~es and employ tens 

of thousands of Americans in states around our country. EU-based holding companies own htgh 

profile U.S. property and life insurers. Ell-headquartered insurers and reinsurers pay billions to 

assist the United States in post-disaster recovery. For example: 

EU insurers and reinsurm paid more than S 12.2 billion in claims (allowing 

the terrorist attack> of September II. 200 I. an event for which 64% of all 

claims were paid by reinsurer.;. Lloyd's paid more than II% ofall9/ll claims. 

Following the devastation of Hurricanes Katrina, Rita and Wilma, more than 

22% of all claims were paid by EU in~urers and reinsurers. with Lloyd's paying 

nearly I 0% of the total. 

Of the total insured claims of S 18.715 billion from Superstonn Sandy, $5.3 

billion was patd by EU-headquartered insurers and remsurers. and 

approximately S2.5 bilhon was paid by Lloyd's. 

This reply identities only the legal benefit.\ conferred upon the United States and its 

stakeholders (consumers and industry). and do.:s not dcscrib~ the financ•al3nd 

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 of legal benefits conferred on the United 

States by tbc Agreement cites directly to the relevunt Article and Paragraph: 
38 


50217003.eps

a. Preamble: the Preamble rcOccts the undcn.tnndings und acknowledgements of the U011cd 

State.- and the EL with respect to the Agreement Wh1le each IS an imponalll statement, 

three warrant specific mention: 

"Sharing the goul of protecting insurance and reinsurance policyholdcn. and other 

consumers. wh1lc rcs~ung each Party·:. system for m,urancc and rcin\urance 

~uperviSIOn and regulauon "; 

"Taking into accoum mformauon exchanged on each Pany·s regulatory frameworks 

and after caretill cons1dcra11on of the-e frameworks"' 

"Acknowlcdg1ng the need for a group capital rcquircm~nt or assessment for 

msurcrs and rcmsurcrs formmg part of a group that opcrntes m the tcmtory of both 

Panics. and that a group capitall\'qUircment or as:;.:s:.m~nt at the lc' cl of the 

worldwide parent undertaking can be based on the approach of the Home Party[.}" 

b. Aniclc I - ObJL"Ctiws 

Wh1lc Art1clc I doc~ not. 10 it~clf, cooter any legal bcneli~ for U.S. stakeholders. the 

ObJWIVC.~ articulate the goals of the Agreement While each 1s Important and nrc 

addr~'ed in !he following substantl\e Articles. thc,e goals de-crib.: the outcome of 

th.: \grcement 

(a) Eliminauon of local prc\Cnc.: rcquircmcnb for U.S and EU rein,ur~r., 

or-"''llting 10 th.: other jun\(hcuon. 

(b) Ehmmation of collatcrnl rcquir.:menL' for U.S. and fU reinsurer~ 

operaung 10 the other juri-diction. 

(c) Proh1b11 the application of group supervision by an EU regulatory 

authority e~eept to the extent that the U.S. insurer has opernhons or actil'ities 

OL'Cumng in or Qriginatmg ti·om the El'. including \\ith rc>pect to ~ho!llc)' and 

l:'dpual. gol'(mancc and rcport10g. 

c. Article 2- D.:fimtion~ 

d. A nick 3 Remsurnnc~ 

Artie!~ 3 describes the Parties· affimmi,·e commitment:. with rC~>pL'Ct to reinsurance. 

2 
39 


50217004.eps

Par:~ graph: 

I. and 2. U.S. rems~~~m will not bt subject to collateml requiremenb, 

or any requtrement of stmilar impact. when operating in the EU unl~ 

EU retn~urer.. are alo;o subject to tho-e requirement~ in the EU. This 

prohibtuon apphL'S both to contrnctualarrnng,,ncnts and to regulatory 

credit to a ceding insurer tor the pureha:;cd rdnsurance. 

3. U.S. r~insurer.. will not be subject h> locnl presence reqUirements 

(i.e. the establishment of a subsidiary. holding company. or other legal 

entttyl or any requirement of similar unpact, when operaung 10 the EU. 

~a). {1). Reheffrom local pre,encc and collateral obligation~ for 

an EU rcmsurer m the Cntl..:d States ts dcpendclll upon th.: EU 

rem~urcr mecting financial eondiuon and market conduct standards. 

The details of these smndan!s, 11 hich remov~ c,cc,MW regulation. 

track existing statc-bas.:d Ia\\ and rcgulauon. 

5. In addttion to the information reqUired by paragraphs 4(a) · (1). 

reinsurer.. may voluntarily provide tnf'ormnuon to regulatory authontics. 

6 1 n the event that an EU reinsurer fat Is to meet the standards and 

reqUirements of paragraph 4,then U.S msurnncc authonlles may r.:-impo>c 

collateral requiremenb on that EL rcinsun:r . 

., Subject to applicable Ia\\. u.S ceding msun.-r. can negotiate an} 

promton in any rcm:;urance agrc~10cnL including for collateral. 

S. bt~tmg U.S. remsurnnc.: agrc~ments are not affected by rhe 

Agreement. t.e. the Agreement doe~ not have o retroactive effect. 

Conststcnt wrth basic contract law, rcm:.urancc agreementS cannot be 

unilaterally amended. An amendment to u rcinsmancc agreement can 

be linuted to the targeted subject matter of the amendment without 

changmg the rcmaming pro\ tstons of the agreement. 

If. for e\arnple, a rdlblll'l.'l' changed iL' name. then the partiC1> 10 that rein,urnnce 

agreement could agree 10 amend the c\l~ting reinsurance agreement with ~(ll.'l:t to th~ 

name change only. which would not alter the agreement's reqmremcnt for collatcrJI. 

fhc~c provtstons are drawn from ~A !C \1odcl Regulation 7~6 (Credtt 

for Rem~urance). 

IJ. If the Agreement were rerminatcd.thcn the United Sllltes and the 

3 
40 


50217005.eps

EU can ngam requtre the pu~ting of collateral or the estabh~hment of a 

local presence lor a rcin~urer domiciled in the otl1er JUrisdiction. 

e. Arucle 4- Group Supeni,ion 

Tins Aniclc dcscrib~> the mutual affim1ation of group supcrvi~ion practices of the 

Lnucd States and the Ell. and dc-cnbcs group supcn·ision pracucc~ to be adopted 

by both the Unned States and the FL upon the d3te of provision31 application. (i.e. 

date of signature,~~ provided in Antcle 10. Pam. 21a)). 

An1clc 4 appli~ only to those U.S. m~ure"' operating in both the Vrutcd State-. and 

thcEU. 

Aniclc 4 acknowledges that the Unucd States and the EU have different 

approaches and ~}'tem~ with re'pcct to msu11111\:e group supervision. and provides 

clnnty rcgardmg the mtcractton of those approaches and sy~tcms gomg forward. 

Paragraph: 

(a) Recogni11ng the vnluc of supervisory colleges, the Agreement 

clarifies that only U.S. msurancc supcmsor. will supervise U.S. insurers at 

the worldwtdc group iclcl. In other word.,, E.U super. 1~1'\ can appl) El! 

law and rcgulauon to u.S. tn\urers onl) for opcratton> and activitic~ that 

occur m or onginatc from the EU. Thts limitation opplic:. to all aspects of 

group supcrvi>ion. includtng sohcnc} and capital go1cmance. and 

reporting. 

In other words. U.S. insurers arc supcrvi..cd at the worldw tdc group l~vcl 

as detcm11ncd by U.S stJh: msurancc regulators. 

(bl SubJCCIW Antcle 3. U.S. msurers and rctnsure~ opcmtmg in the 

EU are subJect to EU la11 and regulation only for purposes of operations 

and act11 tiles occumng m or ungtnaltng from the EU. 

(c) U.S. insurers ar.: requu·.:d to prepare only a U.S. stntc-bns.:d Own 

Risk Soh cnc} Assessment {ORSA) at the world11~dc group level. not both 

a U.S. and an FU ORSA The summa!) rcpon of the l .S ORSA c.-an tiC 

:.harcd With EU supcrvison; through the msurcr's supervt~ry college. In 

other words. at the worldwtde group level, U.S. msurers will complete an 

ORSA con)tslent with U.S. state regulatory practices. 

(dl The requtrcd elemcn~ of the ORSA. 3S described m thts 

parograph. are drawn from the NAIC Rtsk Management and Own R1~k und 
41 


50217006.eps

Solvency Model Act (#505) and the NAIC ORSA Guidance Manual. 

(e) If the ORSA of un EU insurer or reinsur~rs reveals a serious threat 

to U.S. policyholders, then the U.S. insurance regulator may consult with 

the insurer's lead EU supe!Visor and may impose prerentive. corrective or 

responsive measures. 

(f) U.S. insurers operating in the EU report at the worldwide group level 

only to the lead U.S. insurant<! supeiVisor unless the information to be 

reported reveals a direct threat to activities or operations occurring in or 

originating from the EU. In other words, at the worldwide grout> 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 ~rious threat to the ability of an EU insurer 

or reinsurer to pay its claims in the Umtcd States. 

This language tracks the "window~·· of the NAIC Model Holding Company 

Act (11440) provisions that allow state insurance regulators to "scrutinize 

group activity and 3$SCss 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 or~y to 

U.S. insurers that operate mthe EU. U.S. msur~rs and reinsurers 

operating in the EU are relieved of the EU's Soh•ency II group capital 

requirement upon the date of provtsional application, i.e. the dat.: of 

signature (Ariiclc 10. l'ara.2{b)). 

U.S. state insurance regulators who. in reply to mt~mauonal developments, 

have been developing a group capital calculation since 2014, have five 

yearb from the date of signature (Article 10, Para. 2(a) and 2(c)) to develop 

the group capital calculation for the subset of U.S. insurers operatmg in the 

EU. For that five(+) year period. <md upon completion. U.S. msurers 

operating in th~ EU are not thereafter subject to reporting or mamtaming 

the Solvency II worldwide group capital requirement. The language is not 

prescriptive in tem1s oftbc mechanics or specifics of the group capital 

calculation, but defers to th~ ongoing work of U.S. state insurance 

regulators. 

The language regarding "authority to impose preventive, correcnve, or 

otherwise responstve measures on the basis of the assessmem, including 

requiring. where appropriate. capital measures" is intentionally broad. This 

lan!,'llage accommodates both the U.S. state regulatory ;tpproacb (i.e. at 

5 
42 


50217007.eps

I he enlny le,el) and the EL Solvency 11 approach (i.e a11he holding 

company level). 

(i) If the EU exerciSes enhanced group ~upervis1on over a U.S. m'urcr for 

purpo'e' of financial stabllny. then the vnlled States can tcnmnate the 

Agn:cmcnt. 

f. Anicles 5 and 6 Exchange of Information and Anne~ 

These Aniclcs encourage con1inued and enhanced exchange of conlidenual information across 

borders and encourage U.S and EU sUJlcr. 1sors to uultze the template attached as an Annex to 

the Agreement. 

g. An ide 7-Joint Committee 

Aniclc 7 prov1dcs for the establishment of a Joint Comm1ttcc to addr~~~ questions of the 

Agreement's interpretation and implementation. 

h. Anicle S Entry into force 

The Agreement enters into force ~\en tlay' aficr the Pantes exchange \\ntten notice that internal 

ap11roval processes have been completed. llowcvcr. liming for the ctTccuve date of the 

Ag.recmcnt prov•,•ons 1s spec• tied m An1clc I 0. 

i. Aniclc 9- Implementation or the Agreement 

Anick 9 ~scribe' that the EU and the United S1a1c:- >!tall take all mC3\Urc' 10 implement and 

provisionally apply the Agrt'\.'llll'nt. 

j. Anicl.: 10 - Applica1ion of the Agreem~nt 

The Agreement lb entirely cross-conditional. Ne1ther the EU nor lhe United Stutes rece1ve !he 

beneli~ of the Agre~ment without pro\ iding the benefits of the Agreement r or example, if. live 

ye:lTh from the date of signalure. the EU were to reJect the L.S. state regulatOI') approach to 

11orldwtd~ group ~apital for L.S. msurer.. llp.:rating in the EL. then the EU 1\0uld relinqui-h 1he 

benefits of the Agrc~mcnt for EU con\um~n; and indusll)·. 

I. The Agreement applk> to U.S. msuw; opcratmg in the EU (In the date of entry into 

force, or the date of signature, wluchcver is later. 

2. (a) U.S. Insurers and reinsurer; operating in the £U are relieved of Solvency II 

\\Orldlltde group requirements upon signature of theAgrecment (I e. tbe da1e of 

pro1 i>1onal application). 

6 
43 


50217008.eps

(b) Provided that the U.S. stat~ msuraocc re!,'lllators comply wtth Atttcle~ 3 and 4. then 

tit~ provision:. and benelib of Arttcle 3 and 4 wtll be recct\"ed b) U.S. com.umers. 

msurers, and rcm~urcn.. 

fc) Tit.: cxcrci:.c by the EU of ~'llhanced supervision owr a L .S. insur~r or rcmsurer fur 

EU financial stability purpose~ (and vice versa) can be grounds for tcnninatton of the 

Agreement. 

td) U.S. state insurance regulator. adopted the ~ \IC's remsurance collateral reform as a 

nauonal accrcdttauon ~tandard ciT celt\ c JanunT) I. 2019 (I. C. every state would have a 

confonning Jaw or regulation by that date). The Agreement provid~ the states with 

addtttanal ume. potenuall) uno 2023. to adopt mca\uro:s const'l~nt w tth the Agro!(ment. 

(e) The EU will not impo~e a SohenC) II worldwtdc group 'apital requtrcmcnton U.S. 

insurers and rcm~urers O)ll!ratmg m the EU for five yc:~ll\ from the date of Mgnature. and 

then only if the United States ha~ not developed a group capital cal~ulatmn as described 

m Arttde 4(h). 

(t) If the Eu does not nto!(tthe obltgauon> of Anicle 3 with resJlcctto the 

elinunation of local presence rcqutrements, then L.S. state m~urancc regulators rna) 

impo~ a worldw1de group captlal reqUirement or ass~~ment on EU insur~rs and 

rcin\ur~r.. The invel\e is abo tnt.:. 

fgl The EL will diminate local prcs~ncc Jaws within t110 year., (rom the date of 

Slgn<tlurc. 

(hl U.S. rcmsurcrs OJl'rallng 10th~ EL Will not be subJCCtto collateral rcquircm.:nb. or 

the equivalent, withm five years fi·om the dnte of stgnaltiTe. 

(i) The Agreement provisron~ regardmg the Joml Commiuee, Tennmallon and ~fandatoT) 

Con~uhation. and Amendment will be effective upon the date ofs1gnaturc. 

n. Article II - Tcnnination and Mandatory Consultation 

Subjeet to the procedures established m the Agreement, the Agreement can be t~nnmatcd at any 

time by cuhcr pan) 

o. Article 12 - Amendment 

Arttclc 12 sets fonh the proem for amendmg the Agreement 

7 
44 


50217009.eps

Qurstion Number Two 

The Agreement opened the entire EU reinsurdnce 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 of legal benelits described in reply to Quc~tion Number One. 

Stakeholders were consulted extensively before and throughout the negouation of the 

Agreemenl. For purposes of the Agreement negotiations, Treasury and USTR created and 

successfully utilized an unprecedented mechanism to include U.S. stale insurance regulators the 

negotiation of no 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 

signilicantly throughout negotiations of the Agreement, three of whom also served on FACI. 

The Federal Advisory Committee on Insurance (FACD was lirst created in 2011. FACI's 

existence and endeavors arc guided by the Federal Advisory Committee AcltPub.L. 92-463. R6 

Stat. 77 (1971)). Given that Trea~ury and USTR engaged cxtcnsivdy with Congress, state 

regulators, and other stakeholders throughout the Agreement negotiations, and given that the 

Agreement provides material legal. linancial and commercial benefit to U.S. consumers and 

industry. alteration of the FACt role would be both duplicative and unnecessary. 

QuL>slion Number Senn 

Congressional authority i~ not construin~d by Title V of the Dodd-Fmnk Act. Funher, the EU is a 

union of independent sovereign nations wher.:as every other counter-party would likely he a 

~inglc nation. llowcvcr, the Agreement involves prudential insurance and rcinsumncc mc~urcs. 

and is om a trade 3bJfccmcnt. Without comment on matters of international trade, matter.> of 

prudential oversight such as those contained in the Agreement are qualitativdy different. For 

example, Congress does not ··expedite rejection" or approval of NAIC model laws and 

regulations. 

As provided in Title V of the Dodd-Fran~ Act. frequent engagement with all tour CongreSl!ional 

committee!. of junsdiction was extremely meaningful and helpful throughout the negotiation of 

the Agreemenl. 

Question Number Eight 

lnsumnce markets nrc increasingly global, and multi-national U.S. insurers have tremendous 

opportunities for organic growth in the developmg markets of Central and South America Asta 

and Africa. and Eastern Eui'Ope. The Covered Agreement authority in Title V (the "FlO Act") of 

the Dodd-Frank Act may be nccess.1ry to address and resolve differences in the regulation of the 

business of insurance between the United States and other jurisdictions. 

8 
45 


50217010.eps

For example. when the FlO Act became law in 2010. lew in the United States or the EU knew 

whether and, if so. when or 111 what limn. the EU's Solvency II regime would be implemented. 

The Agreement ll ustrat~s that the Covered Agreement autl1ority can resolve important issues of 

cross-border insurance regulation and. at the same time. provide pot.:ntially billions of dollars in 

value to the U.S. consumers and industry. Due to the variability of potemial f.1ct patterns in 

incr.:asingly globalized insurnnce market~, the FlO·~ Corcrcd Agreement authority has an 

appreciably growing value to American mtcrests. and potcntiul expansion of the authority may be 

necessary. 

Question Number Nine 

No. A Covered Agreement can be negotiated with one or more foreign jurisdictions. 

The lntemational Association of Insurance Supervisors (TAIS) is nota ford go jurisdiction 

but is a voluntary association of members fom1ed under the laws of the Switzerland. In 

this sense. the IAIS is akin to the NAIC which, of course. is also a voluntary a~socianon 

of members formed under lhc laws of the United States but is not a 'jurisdiction.'' 

Further, as detailed in r~ply to Question Number One, the Agreement d~monstrates that 

Covered Agreement will be used to preserve and enhance the U.S. system of insurance 

regulation. 

Congrtssman Hultgren 

A. Yes. Rcmsurancc agreements are subject to the pnnciples of baste contract law. 

Amendments to contracts, rcgardlcs.~ of the magnitude oflhc amendment, require an 

agreement of the parties to the contract. An amendment to a reinsurance agreement 

d1at 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 retroacuve application. The hypothetical of a reinsurer's 

scheme of ammgement (a ··Pan VII transfer of business"). or the application of a JUris<tictiou's 

unique legal or regulatory system. depends upon nwnerous complex ,·ariables and cannot be 

an~wered in th.: abstract. However. A11icle 3 of the Agreement preserves the authority of a ccdi11g 

insurer's U.S. state insurance regulator to re-impose collntcrul and other requirements on a 

rdnsurer that fm ls to satisfy the Agreement's financial condition and market conduct standards. 

Funhcr. a Pan Vll transfer would likely trigger the standard provisions of a reinsurance 

agreement that allow the ceding insurer to accelerate the posting of collateral 

9 
46 

1 Anne Wall and Michael Harney. Letter to Congress Re: Initiation of Covered Agreement Negotiations, 20 Nov. 2015. 

PREPARED STATEMENT OF JULIE MIX MCPEAK 

COMMISSIONER, TENNESSEE DEPARTMENT OF COMMERCE AND INSURANCE, ON BEHALF

OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS

MAY 2, 2017 

Thank you Chairman Crapo, Ranking Member Brown, and Members of the Committee. My name is Julie Mix McPeak. I serve as the commissioner for Commerce 

and Insurance for the State of Tennessee and current President-Elect 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 well aware of the disparate regulatory treatment some European 

Union (EU) jurisdictions are imposing on certain U.S. insurers doing business in the 

EU and are committed to working with Congress and the Administration to address 

this important issue for our sector. While a covered agreement is one way to do so, 

we have serious concerns with the text of the current agreement. It is ambiguous 

in several respects making it difficult to evaluate the benefits to the U.S. insurance 

sector and more importantly, making it difficult to implement. We therefore urge 

the Administration to clarify or confirm certain provisions prior to moving forward 

with this agreement and asking the States to take on the significant undertaking 

related to any implementation. 

Background 

Under the EU’s new Solvency II regime, which went into effect on January 1, 

2017, an assessment is required to determine whether another country’s regulatory 

system is equivalent to elements of their new regime, and then penalizes that nonequivalent country’s insurers with additional regulatory requirements. This has the 

effect of either imposing the EU approach on the rest of the world, or placing companies from those jurisdictions at a competitive disadvantage when operating within 

the EU. Last year, certain EU member countries such as Germany and the U.K. 

began imposing additional regulatory requirements on U.S. companies as they implement Solvency II. Though the materiality of the impact to the U.S. insurance sector does not appear extensive, this is troubling. 

The EU may argue that serving as judge and jury of other countries’ regulatory 

systems is an important tool for ensuring emerging markets are safe for EU investment. But the U.S. is the largest market in the world and has proven to be as effective as the best aspirations of Solvency II. Keep in mind, Europe’s new system won’t 

be fully implemented for another decade, may undergo further revisions, and has 

been deemed inappropriate for the U.S. insurance sector by State insurance regulators and the Federal Reserve. We are already subject to assessment and scrutiny 

by governors’ offices, State legislatures, Congress, Government watchdogs, and 

international standard setters, and our track record of ensuring a competitive and 

fair market for more than 145 years speaks for itself. 

That’s not to say U.S. insurance regulators are unwilling to work with our colleagues overseas to address regulatory cooperation and areas of convergence. For 

several years, we have engaged our EU counterparts on regulatory issues, and to 

coordinate the oversight of global market players. As part of the U.S./EU dialogue 

project with Treasury and the EU, we have explored both our regulatory regimes 

in depth and discovered that despite our structural differences, we have much in 

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

United States’ group solvency regime—which largely benefited EU insurers—and 

acknowledged our system’s substantial confidentiality protections; all without a covered agreement. 

Nevertheless, 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 to address the disparate treatment of U.S. firms operating in 

the EU. 1 They made it clear they would not enter into a covered agreement unless 

terms of the agreement were beneficial to the United States. State insurance regulators were also promised a meaningful role during the covered agreement process. 

In that notification, the Treasury Department and USTR set out the following negotiating objectives: 

47 

2The 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 information exchange. 

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;’’ 2

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.’’ 

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, 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 few of us involved in the process were subject to strict confidentiality with no ability to consult our staff and fellow regulators, and with little ability to impact the outcome. In fact, even here testifying before this Committee, I cannot identify specific concerns or disagreements that may have occurred during the 

negotiation. 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. 

Negotiations were completed in January and the Agreement was submitted to Congress on January 13 for the layover period mandated by the Dodd–Frank Act. 

An Ambiguous Agreement Is Not an Agreement 

Based on a plain reading of the text, we believe the previous Administration’s 

Treasury Department and USTR failed to meet several of their objectives. While we 

recognize the agreement appears to provide some benefit to certain 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 Bermuda or Switzerland, for example, (which have received equivalence) receive greater 

benefits from the EU than U.S. insurers. Yet, under this agreement, the United 

States, one of the most sophisticated and well-regulated insurance marketplaces on 

the globe, continues to be treated by Europe with unjustifiable skepticism. 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. 

While there is little that can be done about the process issues involved in reaching 

this agreement, this Administration still has an opportunity to address the substantive issues raised by the agreement itself, notably the myriad of ambiguities 

that exist. Much has been made by former Administration officials about how this 

is a great deal for the U.S. We would welcome an outcome that benefits the U.S. 

market and resolves the outstanding issues with finality but in looking at the four 

corners of the document, it is impossible to know whether we have such an outcome 

without confirmation from those interpreting it on both sides of the Atlantic. Thus 

we support the bipartisan requests coming from Congress requesting that the Treasury Department and USTR find some mechanism to resolve these important issues 

before States are asked to engage in the resource intensive efforts surrounding implementation. Let me provide just some specific examples of a few of the key areas 

of ambiguity 

Overall the language of the agreement is ambiguous as to the obligations of the 

parties and the entities to which it applies (e.g., the insurance group, the insurance 

48 

3 Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance, January 13, 2017, p. 12. 4The States and NAIC has certified 32 reinsurers in total, most of which are Bermuda based. 

and non-insurance group, the legal entities, or a combination). The agreement also 

appears to supersede existing authority 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.’’ 3 The provision implies State insurance regulators are effectively required to develop and adopt a group capital requirement, and 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 U.S. approach to be 

unsatisfactory. 

As currently structured, these ambiguities would have to be resolved by an undefined ‘‘Joint Committee’’ composed of representatives of the U.S. and EU. This 

agreement does not set forth 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. If resolution cannot be reached on these ambiguities, this 

agreement may be voided. Under its terms, the agreement is cross-conditional—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 renegotiation through the Joint Committee and uncertainty for U.S. industry, policyholders, and regulators. 

EU Market Access at the Expense of Reduced Reinsurance Collateral 

As Congress and the Administration weigh the merits of the agreement, the focus 

from supporters has been on the perceived benefits of the agreement for the subset 

of U.S. firms doing business in the EU, but consideration must also be given to what 

is being given up to achieve that benefit. The one objective met was a key negotiating priority for the EU, total elimination of reinsurance collateral requirements. 

In fairness, this covered agreement retains a few of the elements from the NAIC’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 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 a fulsome evaluation of 

a reinsurer’s creditworthiness and despite the Treasury Department having verbally 

committed it would never accept an agreement which totally eliminates reinsurance 

collateral, it did exactly that. 

Existence of reinsurance collateral provides strong incentives for reinsurers to 

perform on their obligations and regulatory requirements to protect all insurers, 

particularly smaller insurers that may not have the leverage to renegotiate and require it contractually from reinsurers with whom they do business. Though we believe it is necessary for counterparties 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 39 States representing approximately 70 percent of 

direct written premium and will become an NAIC Accreditation requirement on January 1, 2019, leading to further adoption by States. Interestingly, even though certified reinsurers will likely have reduced collateral requirements, of the 215 EU reinsurers that we are aware of, only 6 have sought and received certification—the 

remaining reinsurers have not even filed an application. 4 Under the terms of the 

49 

5 United States. Cong. House. Financial Services Subcommittee on Housing and Insurance. 

Hearing Regarding Assessing the U.S.–EU Covered Agreement. February 16, 2017. 115th Cong. 

1st sess. Washington: GPO, 2017 (statement of Ted Nickel, Wisconsin Insurance Commissioner) 

Agreement, all EU reinsurers, even those that have not applied for certified reinsurer status, will be eligible for zero collateral even though they may not meet existing financial strength and other regulatory requirements. When you consider even 

significantly reduced collateral protections represent commitments to policyholders 

and a leverage point for regulators, wiping them out entirely will force regulators 

to find other mechanisms with which to protect insurers and their policyholders 

from the risks posed by reinsurance counterparties. This could possibly include additional capital charges or restrictions imposed on ceding insurers. This covered agreement essentially transfers the credit risk of foreign reinsurers to their customers: 

U.S. insurance companies, and by extension, U.S. policyholders. 

In sum, the issues addressed by this covered agreement are a creation of the EU’s 

policy making decisions but they are being solved entirely at the expense of State 

insurance regulation, U.S. industry, and consumers and regulators. Nonetheless, 

State regulators are firmly committed to resolving these issues so U.S. firms are not 

put at a competitive disadvantage when operating in the EU. 

Confusion Surrounding the Agreement’s Terms 

Earlier this year, my colleague and NAIC President Wisconsin Commissioner Ted 

Nickel testified before the House Financial Services Subcommittee on Housing and 

Insurance, and detailed our concerns. 5 At that time, given the seriousness of these 

concerns, we urged renegotiation of the agreement. At the same hearing, former FIO 

Director Michael McRaith, one of the chief negotiators of this Agreement, testified 

to what he believed the agreement accomplished, specifically that ‘‘the Agreement 

affirms that the U.S. supervises its insurance sector as the U.S. deems appropriate.’’ 

He noted it only required States to address collateral requirements in a manner 

that was supportive of State regulator efforts to implement changes to their credit 

for reinsurance laws and regulations that would reduce reinsurance collateral, finish 

our ongoing work on a group capital calculation, and for purposes of group supervision, treat EU-based insurance companies operating in the U.S. as they are treated today. He asserted that the Agreement recognizes the current U.S. insurance 

group supervision practices, prohibits Europe from extraterritorial application of its 

requirements on U.S. based holding companies or legal entities, and requires certain 

EU jurisdictions to immediately lift their requirements that U.S. reinsurers maintain a local presence as a condition of doing business. 

Candidly, we were surprised. Mr. McRaith’s characterization of the Agreement, if 

shared by the present Treasury Department and importantly by the EU, is more 

promising than a plain reading of the text suggests. As such, the focus of our requests to Congress, Treasury, and the USTR has evolved to urge confirmation of 

some of these key assertions. We want to ensure that all parties agree that we have 

the deal we’ve been told we have. We believe that confirmation may be achieved 

without renegotiation and without undue delay. Critically, however, we believe that 

these ambiguities must be resolved at the outset of the agreement rather than at 

some later date through the opaque process afforded by the Joint Committee. It is 

entirely unacceptable to ask 50 State Governors, legislatures, and regulators to revise some of the fundamental elements of their system based on the informal interpretations of the agreement by a former Treasury official no longer involved in its 

implementation or interpretation. We have confidence that through the bipartisan 

efforts of this Congress as well as the commitment of this Administration to ensure 

the U.S. obtains the best deal possible for our citizens, we can resolve these ambiguities and find a way forward. 

The Path Forward 

Last week, the NAIC submitted a list of provisions to the Treasury Department, 

the USTR, and the Congressional Committees of Jurisdiction that we would like 

clarified before the United States moves forward with implementation of the Agreement. Among those included on the list are: 

1. Clarifying that insurance regulators can impose regulatory requirements, other 

than collateral, to address reinsurance counterparty risk; 

2. Clarifying that existing group supervisory reporting requirements under State 

law continue to apply to EU affiliates of U.S. companies; 

3. Clarifying that the NAIC’s group capital calculation work would meet the 

terms of the group capital assessment provisions of the agreement; 

50 

1The RAA is a national trade association representing property-casualty companies that specialize in assuming reinsurance in the U.S. In 2015, RAA’s underwriting members and affiliates 

had surplus of $194 billion and $125 billion in gross written premiums. 2The AIA is the leading property-casualty insurance trade association representing approxi- mately 300 insurers that write more than $125 billion in premiums each year. AIA 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. 3The American Council of Life Insurers (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. Learn more at www.acli.com. 4The Council of Insurance Agents and Brokers has 205 members selling 80 percent of domestic commercial property/casualty premiums. 

4. Clarifying that collateral requirement for current reinsurance contracts will be 

unaffected and confirmation as to how losses treated prior to a new reinsurance agreement will be treated; 

5. Clarify how reinsurance collateral requirements should be addressed prior to 

the conclusion of the 5-year period for full elimination of requirements. 

We urge the Administration, with the direct involvement of the States, to expeditiously provide the needed clarity and comfort now rather than taking an imprudent 

leap of faith that such clarifications will be ‘‘worked out’’ at a later date through 

a Joint Committee process. Absent such clarifications, we cannot be assured that 

State implementation will meet the terms of the agreement and satisfy the current 

Administration or the EU, potentially putting us in a position of perpetual renegotiations or worse yet, having made changes to State laws and regulations only to have 

the EU challenge those at later date and revert to treating our companies unfairly. 

Under these circumstances, it is hard to see how our sector can achieve certainty 

and finality regarding their concerns. Finally, we request that the Administration 

confirm State insurance regulators will be included in any joint committee and that 

insurance regulators from all the States will be consulted on all issues that the committee discusses. As the States are the primary regulators of the insurance sector 

and would have to implement the provisions of any agreement, our involvement and 

buy-in is essential to its success. 

Conclusion 

We remain deeply concerned with the treatment of certain insurers by the EU 

and we remain committed to resolving these issues. However, it is not in the best 

interest of the United States insurance sector and policyholders to proceed with implementation of the Agreement without clarification of its ambiguous terms and a 

clear understanding shared on both sides of the Atlantic. Such confirmation of intent will ensure the EU will not be able to use the agreement’s lack of clarity as 

a means of imposing their regulatory system and ultimately their will on our insurance sector to the detriment of U.S. insurance companies and policyholders. Working together with the Administration and Congress, we believe we can obtain a level 

of comfort and clarity that will achieve finality and certainty for our sector without 

sacrificing consumer protections. Thank you for this opportunity to testify today and 

I would be pleased to take your questions. 

PREPARED STATEMENT OF MICHAEL C. SAPNAR 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, TRANSATLANTIC REINSURANCE COMPANY, ON BEHALF OF THE AMERICAN INSURANCE ASSOCIATION, AMERICAN COUNCIL OF

LIFE INSURERS, AND THE REINSURANCE ASSOCIATION OF AMERICA

MAY 2, 2017 

My name is Michael C. Sapnar and I am President and CEO of Transatlantic Reinsurance Company (TRC) and the immediate past Chairman of the Reinsurance 

Association of America (RAA). I am testifying today on behalf of my company, the 

RAA 1, the American Insurance Association 2 (AIA), the American Council of Life In- surers 3 (ACLI) and the Council of Agents and Brokers 4 (CIAB). I am pleased to appear before you today to express our collective full support for the recently concluded Bilateral Agreement between the European Union and the United States of 

America on Prudential Measures Regarding Insurance and Reinsurance (the ‘‘CovVerDate Nov 24 2008 13:33 Dec 15, 2017 Jkt 046629 PO 00000 Frm 00054 Fmt 6621 Sfmt 6621 L:\HEARINGS 2017\05-02 ZZDISTILLER\50217.TXT JASON
51 

5The branches and/or offices are in: London, Paris, Munich, Zurich, Dubai, Buenos Aires, 

Panama City, Rio de Janeiro, Hong Kong, Shanghai, Singapore, Sydney, Tokyo, Chicago, Miami, 

Overland Park, San Francisco, Stamford, Bermuda and Toronto. There are also five subsidiaries: 

TransRe London Ltd. in the United Kingdom; Calpe Insurance Company Ltd. in Gibraltar; 

TransRe Zurich Ltd. in Switzerland; Fair American Insurance and Reinsurance Company in 

New York; and Fair American Select Insurance Company in Delaware. 

ered Agreement’’). I commend Chairman Crapo and Ranking Member Brown for 

holding this important and timely hearing and welcome the opportunity to address 

the Banking Committee. I also want to thank the Treasury Department, the U.S. 

Trade Representative and the participating State regulators for their 13 months of 

hard work in bringing the Covered Agreement to fruition. Transatlantic Reinsurance Company is a New York domiciled professional reinsurer. TRC is a whollyowned subsidiary of Transatlantic Holdings, Inc., a Delaware corporation, which is 

a wholly-owned subsidiary of Alleghany Corporation (NYSE: Y), a Delaware corporation. TRC has over 600 employees worldwide, most of whom are in the United 

States. TRC is robustly regulated in the United States with New York as its domiciliary regulator and New Hampshire as its group supervisor. TRC is licensed or 

qualified in every State, the District of Columbia, Guam and Puerto Rico and operates globally through a network of 20 branches and offices and 5 subsidiaries. 5 The 

worldwide branch structure is a more efficient use of capital because it consolidates 

assets into one entity to enhance TRC’s standing as a potential counterparty for reinsurance transactions. 

The Covered Agreement Solves Real Problems Today and Makes U.S. Companies More Competitive 

The Covered Agreement is a ‘‘win’’ for U.S. companies doing business in the European Union (EU) and for the U.S. system of insurance regulation. It is also consistent with the current Administration’s regulatory policy to ‘‘enable American companies to be competitive with foreign firms in domestic and foreign markets, advance American interests in international financial negotiations and meetings, [and] 

make regulation efficient, effective and appropriately tailored.’’ The Covered Agreement resolves several important prudential issues that are adversely impacting U.S. 

companies doing business in both the United States and the EU. These issues have 

been discussed by the parties for years, and in some instances decades, without resolution. The Covered Agreement will provide the following immediate benefits to the 

U.S. (re)insurance sector: 

1. U.S.-based reinsurers can resume doing business in markets where they were 

excluded because of the January 1, 2016, implementation of the EU’s Solvency 

II regime. This development enables U.S. companies to keep capital and jobs 

in the United States rather than being forced to create Solvency II compliant 

branches or subsidiaries throughout the EU to maintain existing business. The 

Agreement also ensures that qualifying U.S.-based reinsurers will not have to 

post collateral in the EU. 

2. Global group supervision can only be conducted by the home country supervisor: U.S. insurers with EU operating companies will only be subject to worldwide prudential insurance group oversight by their lead U.S. State regulator 

and not ‘‘upstream’’ supervision by EU Member States. It is estimated that this 

limitation on the application of Solvency II will save U.S.-based property/casualty and life companies potentially billions of dollars in additional capital and 

compliance costs. 

3. Official acceptance throughout the EU of the U.S. insurance supervisory framework which benefits all U.S.-based insurance groups and provides valuable 

support for the U.S. regulatory system that can be leveraged in current and 

future international negotiations and regulatory dialogues. For example, this 

is important precedent for the argument that the U.S. approach to group capital (including valuation) should be incorporated into the IAIS International 

Capital Standard as an acceptable approach. 

Our strong support for the Covered Agreement is consistent with TRC’s equally 

strong support for the well-tested U.S. State-based insurance regulatory system. 

The Covered Agreement is a targeted Federal tool that is intended to supplement 

the State-based regulatory system by dealing with important international regulatory issues that State regulation cannot constitutionally address. No regulatory 

authority is created at the Federal level and any potential Federal preemptive authority is narrowly targeted. 

52 

6The European Insurance and Occupational Pensions Authority (EIOPA) is a European 

Union financial regulatory authority whose responsibilities include microprudential oversight of 

insurance at the EU level (as opposed to the Member State level). EIOPA is often compared 

to the NAIC but is different in that it has certain regulatory authorities. 7 Interestingly, the E.U. deemed the U.S.-based regulatory system equivalent for U.S. subsidiaries of EU-domiciled groups so that those entities did not have to be Solvency II compliant. 

While U.S. groups were expected to fully comply with Solvency II because of their EU subsidiaries, U.S. subsidiaries of EU groups were exempt from complying with Solvency II. 

Transatlantic’s EU Issues 

As a global reinsurer, TRC specializes in managing risks, most notably natural 

and man-made catastrophes, for others. The one risk that is difficult to manage, 

however, is regulatory uncertainty. In our business, regulatory uncertainty leads to 

lost jobs, increased operating costs, lost growth opportunities and reluctance on the 

part of new and existing clients to choose us as a service provider. 

For over 7 years, TRC has encountered challenges arising from the implementation of Solvency II and the lack of fair treatment for U.S. companies operating in 

the EU. As early as 2008, TRC was tracking the EU’s development of Solvency II 

and the potential negative consequences for U.S. companies. In testimony to the 

House Financial Services Committee Subcommittee on Insurance, Housing, and 

Community Opportunity in 2012, I identified issues that TRC was then having because of the impending implementation of Solvency II. I also testified that, at the 

same time the NAIC was lowering barriers by revising its Model Credit for Reinsurance Law in 2011 to make it easier for non-U.S. reinsurers to conduct U.S. business, 

the EU was raising barriers and making it more difficult for U.S. companies to do 

business in the EU. During the NAIC’s deliberations, TRC repeatedly asked State 

regulators to seek and obtain reciprocity of market access (most particularly the EU) 

in return for the favorable changes for non-U.S. reinsurers. This did not occur. In 

2012, TRC supported the U.S.-EU Insurance Dialogue involving regulators from 

both jurisdictions. While this process enhanced the mutual understanding of both 

regulatory regimes, it yielded no tangible results addressing U.S. companies’ issues. 

Instead, TRC’s issues in the EU continued, including: 

1. TRC was confronted with having to choose between having its local U.K. 

branch regulated on a Solvency II basis up to the U.S. holding company or 

forming a Solvency II-compliant entity somewhere in the EU to limit the upstream application of Solvency II to the U.S. operations. In an effort to avoid 

the upstream regulation, TRC chose to turn the U.K. branch into a subsidiary 

which required TRC to tie up $500 million in capital in the U.K. This corporate 

move continues to negatively impact our operating costs. Nonetheless, the U.K. 

has continued to require more and more from this U.K. subsidiary, including 

requiring: additional independent directors on the board of our wholly-owned 

subsidiary; additional local compliance and risk management personnel in addition to our large U.S. home office staff; implementation of a partial internal 

model to comply with Solvency II; restrictions on various highly graded investments held by the U.K. subsidiary; and the ring-fencing of $800 million in assets to cover the loss reserves accumulated by the branch over a 30-year period 

of assuming reinsurance without incident. These requirements have cost TRC 

millions of dollars annually without any additional benefit to our customers. 

In addition, a concern by clients over TRC segregating its capital to form the 

U.K. subsidiary (instead of having the security of the company’s entire U.S. 

capital base) has cost TRC business opportunities. 

2. In 2014, Poland, citing Solvency II, excluded U.S. Reinsurers from the local 

market. Much discussion ensued with the Polish regulator regarding this restriction, however, the regulator ultimately deferred to EIOPA 6 for clarification. TRC was able to construct a workaround. Without that workaround, however, TRC, like many other U.S. reinsurers, would have been excluded from the 

Polish market unless it opened a branch in Poland with its own capital and 

personnel. 

3. In late 2015, the U.K., again citing Solvency II, insisted that all U.S. companies operating in the U.K. needed to be Solvency II compliant up to the ultimate controlling entity or seek a discretionary and revocable ‘‘other methods 

determination’’ waiver from complying with Solvency II. This was a result of 

the E.U.’s failure to formally recognize the effectiveness of the U.S. State-based 

regulatory system for companies that are members of U.S.-domiciled groups. 7

Ultimately, TRC was forced to incur the expense and time to seek a waiver 

of the group Solvency II requirement under the ‘‘other methods determination,’’ 

which, while granted, will expire on December 2018 unless revoked earlier. If 

53 

the Covered Agreement is not signed, TRC will have to seek another waiver 

request in 2018. 

Finally, although not impacting TRC, in late 2015, the German regulator issued 

a notice stating that after January 1, 2016, U.S.-based reinsurers would no longer 

be able to operate in Germany on a cross-border basis and would be forced to set 

up a local branch. This decision was based upon the fact the U.S. has not been 

deemed ‘‘equivalent’’ under Solvency II. Because TRC has an existing regulated Munich branch, we were allowed to continue writing business. Other U.S. companies, 

however, lost critical business with little notice. Shortly thereafter, Austria adopted 

a similar interpretation of Solvency II. Later in 2016, Belgium did something similar, seriously disrupting the annual renewal process for U.S. reinsurers and causing 

TRC to lose a valuable account. There are at least nine other EU States with similar laws. This uncertainty has a chilling effect on U.S. reinsurers’ business and may 

dissuade current and new customers from doing business with us. 

Prompt Signature of the Agreement Is Critical for U.S. Companies 

The statutorily mandated 90-day Congressional layover period has expired and 

the Administration should promptly sign the Covered Agreement. A delay in signature could result in elimination of the benefits U.S.-based companies would receive 

under the Agreement. As a matter of good faith, the EU is currently forbearing from 

enforcing its Solvency II rules and regulations on U.S.-based companies doing business in the EU in anticipation of the parties’ signature of the Covered Agreement. 

However, this forbearance is not unlimited. For example, the German regulator 

(BaFin) advised the U.S. by January 13, 2017, letter (attached), that it would suspend its local presence requirements for U.S. reinsurers while both sides proceeded 

to finalize the Covered Agreement. The letter states: 

The ongoing future supervisory approach regarding U.S. domiciled reinsurers will heavily depend on the fact whether the EU-U.S. Agreement 

comes in fact finally into force. This means that BaFin’s current statements 

regarding the treatment of U.S.-domiciled reinsurers on the basis of the 

EU–U.S. Agreement will not be valid (also in a retroactively sense) anymore if BaFin receives serious statements of one of the final decision-making bodies of both parties that the agreement will not come into force respectively the agreement will fail [sic]. 

The Covered Agreement’s provisions eliminating local presence requirements are 

the linchpin for U.S. reinsurers to be able to write EU business. If the Agreement 

is not signed, these U.S. companies will not be able to renew, much less write any 

new, business in the EU without first going through the regulatory processes necessary to create branches and/or subsidiaries in multiple EU Member States. This 

not only requires sufficient time but also the relocation of capital and personnel 

from the U.S. to the EU. Because the annual renewal process begins in early September for January 1 renewals, it is imperative that U.S. companies—and the EU 

market—have certainty regarding U.S. companies’ ability to write business in the 

EU before that time. If the Agreement is not signed soon, Germany (and the other 

nine countries that have similar laws) may suddenly decide to enforce their local 

presence requirements, possibly removing the option for TRC to establish the requisite local presence in time for the 2018 renewal season. 

Asserted Challenges to the Covered Agreement Should Not Delay Signature 

Several companies contend that before the Covered Agreement can be signed, 

there must be an ‘‘official’’ clarification of certain terms executed by both the U.S. 

and the EU. These assertions are not only incorrect, but ignore the procedure set 

forth in the Agreement to resolve such issues. First, merely asserting something is 

unclear does not make it so. In fact, the plain meaning of the Agreement’s text demonstrates otherwise. The Agreement’s language is further reinforced by the National 

Association of Insurance Commissioners (NAIC) Model Laws and Regulations on 

which portions of the Agreement were based, the U.S. Treasury Department’s January 18, 2017, Fact Sheet (attached), and the European Commission’s April 4, 2017, 

Explanatory Memorandum to the European Council (attached). Second, Section 7 of 

the Covered Agreement establishes a Joint Committee of representatives from the 

United States and the EU which shall provide ‘‘a forum for consultation and to exchange information on the Administration of the Agreement and its proper implementation.’’ Any questions about implementation can and should be addressed in 

this forum after the Agreement is signed. We strongly support that State insurance 

regulators should be included in this forum. Finally, to the extent this proposed 

‘‘simple solution’’ to clarify the Agreement is a call to renegotiate the Agreement, 

54 

8 July 11, 2014, letter from NAIC to Jonathan Faull (European Commission) (‘‘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 challenging to conduct a comprehensive comparison of our two regulatory systems in practice until Solvency II 

is fully operational and the outcomes it produces based on actual experience are better understood.’’) (attached). 

this should be rejected as it would erase the benefits to U.S. (re)insurers and return 

the U.S.–EU relationship to the pre-agreement status quo of regulatory uncertainty. 

A. The two key substantive issues addressed by the Covered Agreement do not 

need clarification: 

1. Group Capital. Several have asserted that the Covered Agreement mandates a 

group capital requirement in the U.S., and possibly one that resembles Europe’s 

Solvency II. The language does not support this interpretation. First, Article 

4(h) of the Agreement states that for a U.S. or European insurance group to 

enjoy the benefits of the Agreement, it needs to be subject to a group capital 

calculation by its home supervisor. This word choice is significant because it 

specifically contemplates the NAIC’s current initiative to develop a group capital assessment or calculation (not a standard or requirement as in the EU). 

Second, Article 4(h) does not (and legally could not) alter existing State sovereign authority. Third, nothing in Article 4 (or elsewhere in the Agreement) 

suggests that Solvency II’s group capital standards should be imported into the 

U.S. To the contrary, the Agreement’s Preamble reflects a mutual acceptance 

by the EU and the U.S. of, and respect for, each other’s governing insurance 

financial regulatory architecture. 

2. Prospective Treatment of Reinsurance Collateral Relief. The Covered Agreement 

text also does not support the assertion that collateral posted pursuant to existing contracts will be automatically released once the Agreement is signed. Article 3 incorporates text from Section 8(A)(5) of the NAIC’s Model Credit for Reinsurance Regulation, which does not allow automatic retroactive changes to existing contractual obligations based upon statutory reductions in collateral requirements. The Covered Agreement and the NAIC Model require changes to 

existing contracts to reflect changing statutory collateral rules only if amendments to the contracts are material (and, of course, agreed to by both parties). 

The Fact Sheet underscores the U.S. view: ‘‘It is understood that changes to regulatory requirements for posting collateral would not apply to amended agreements unless such amendment constitutes a material change to the underlying 

terms of the agreement.’’ 

B. A few companies also have argued that the Covered Agreement should have 

achieved an official Solvency II ‘‘equivalence’’ determination for the United States. 

Although this designation would have bestowed benefits on U.S. companies, it would 

have placed unacceptable requirements on the U.S. regulatory system. Importantly, 

State regulators never sought or wanted this solution for a simple reason: Solvency 

II’s statutory equivalence process involves a prescriptive, unilateral evaluation by 

the EU of another jurisdiction’s regulatory regime to assess whether its rules and 

regulations are ‘‘equivalent’’ (i.e., very similar to) Solvency II. The State regulators 

understood this when, in July 2014, they advised the EU that the U.S. would not 

be pursuing ‘‘equivalence’’ because of the significant changes to the U.S. supervisory 

system such a path would require. 8 The Covered Agreement reflects respect for the 

State regulators’ July 2014 decision as it achieved significant benefits for the U.S. 

without any requirements that the U.S. adopt any Solvency II requirements. The 

Preamble of the Covered Agreement makes it clear that the U.S. does not intend 

to adopt any Solvency II requirements and that the EU understands this: ‘‘Sharing 

the goal of protecting insurance and reinsurance policyholders and other consumers, 

while respecting each Party’s system for insurance reinsurance supervision and regulation.’’ Furthermore, the very structure of the Agreement reinforces this agreed 

parity between the two regulatory systems as the Parties’ obligations and benefits 

are mutual and cross-conditional throughout the Agreement: both sides must continue to perform their obligations to receive the benefits; if one side does not perform, the other side is relieved of its obligations under the Agreement. 

C. Although the process could be improved, the Covered Agreement was negotiated and concluded in accordance with existing law. Process concerns should be 

addressed but should not adversely impact the decision to sign this Covered Agreement. One process issue that should be addressed is formalizing the role of State 

insurance regulators, who are essential to the negotiation and implementation of a 

covered agreement. It is important to note, however, that State regulators did have 

a formal substantive role in this Covered Agreement process. Former FIO Director 

55 

Michael McRaith recently testified at the House Financial Services Committee 

Housing and Insurance Subcommittee Hearing that State insurance regulators attended and participated, often in person, in every negotiation. He also testified that 

State regulators promptly received every EU document and that there were conference calls for FIO and USTR to receive their input before documents were sent 

to the EU. NAIC President Ted Nickel testified at the same House hearing that 

NAIC suggestions were incorporated into the drafts sent to the EU. 

In conclusion, the Covered Agreement addresses bilateral insurance regulatory 

issues that were creating barriers for U.S. companies in the EU. Although there 

may be lessons learned about the process, the Agreement is a significant and timely 

‘‘win’’ for the competitiveness of U.S.-based insurers and reinsurers, insurance consumers, and the U.S. insurance regulatory system. The Covered Agreement removes 

regulatory uncertainty for companies and establishes fair terms upon which companies operating in both the EU and the U.S. can do business in these jurisdictions. 

This was accomplished without importing Solvency II into the U.S., something 

which could not have been achieved with a Solvency II equivalence determination. 

56 


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BaFin 

llofltll -..., 12 Sll 53002 11oM -

Michael T. McRaith 

Director, Federal Insurance Office 

U.S. Department of the Treasury 

1500 Pennsylvania Avenue, NW 

WASHINGTON, D.C. 20220 

VEREINIGTE STAATEN VON AMERIKA 

13.01.2017 

Reference: VA 45-1 2263-2016/0023 (Please quote In your reply) 

2017/0083827 

Dear Mr McRalth, 

1 would like to express again BaRn's serious willingness to apply the 

rules regarding the suspension of local presence requirement for USreinsurers in the eu according to the agreement as soon as possible. 

However, BaFin is only In the position to agree on this suspension under 

the condition that the EU-U.S. agreement reaches a certain legally bind· 

lng status. Based on our current assessment, one can assume that this 

binding status is reached with the formal exchange of letters signed by 

the chief negotiators of both parties with the EU-U.S. agreement between both parties. According to my information these Signed letters 

had been exchanged at 12 January. We understand that both sides are 

now proceeding with their domestic procedures respecting the final text. 

We would like to emphasize that after the exchange of the signed letters 

mentioned above, the ongoing future supervisory approach regarding 

US-domiciled reinsurers will heavily depend on the fact whether the EUu.s. agreement comes In fact finally Into force. 

This means that BaRn's current statements regarding the treatment of 

US-domiciled reinsurers on the basis of the EU-U.S. agreement will not 

be valid (also In a retroactively sense) anymore if BaFin receives serious 

statements of one of the final decision making bodies of both parties 

that the agreement will not come into force respectively the agreement 

will fall. 

Yours sincerely, 

"'L!4<..~- ~ t· JJ.. 

Washausen·Richter 

(Deputy Chief Executive Director) 

Jnsur1nce •nd 

~IUAoa Funds Supe:rrislon 

-

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~~ 

... Sb-. 108 

53117 """" I Gctmon1 

... Cootact: _ 

SKdon YA 45 

ron +49(0)2284108·2373 

FlX +49{0)228•108-ISSO 

I>OI!Jleii<Obllln.clt 

www.bolln.de 

Qs><rotor: 

ron +49(0)2284108·0 

Fax ~(0)22841084550 

Oftlclll.-nc:es: 

53117110M 

Gtlumelndo<ferStr. I08 

5317SIIOM 

"'"""""""'-ll•15 ---·4-48 
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50217012.eps

Bilatel'lll Agreement between the European Union and the United States of America 

On Prudential Measures Regarding lnsurance and Reinsurance 

[U.S.-EU Covered Agreement) 

FACT SHEET 

January 18,2017 

The United States bas negotiated a covered agreement with the European Union (EU), hereunder 

referred to as the Covered Agreement The Covered Agreement affirms the U.S. system of 

insurance supervision, protects insurance consumers, and provides meaningful benefits for U.S. 

insurers and reinsurers. 

Pursuant to 31 U.S. C.§ 314, the Federal Insurance Office (FlO) Act of2010 authorizes the 

Secretary of the Treasury (Treasury) and the United States Trade Representative (USTR) jointly 

to negotiate a covered agreement with one or more foreign governments, authorities, or 

regulatory entities. A covered agreement is a "written bilateral or multilateral agreement 

regarding prudential measures with respect to the business of insurance or reinsurance." 

On November 20, 2015, Treasury and USTR notified Congress that FlO and USTR would begin 

joint negotiations with the EU. These negotiations began in February 2016 and concluded in 

January 2017. 

The Covered Agreement limits the worldwide application of EU prudential measures on U.S. 

insurers operating in the EU, including the elimination of worldwide group capital, governance, 

and reporting requirements. EU prudential supervision of U.S. insurers will be limited to these 

insurers' EU operations and activities. Additionally, the Covered Agreement includes statebased reinsurance provisions that build on work largely underway at the state level and are 

expected to reduce reinsurance costs for primary insurers and improve the alfordability and 

availability of insurance products to personal and commercial insurance consumers. 

In the United States, state insurance regulators have general authority over the business of 

insurance (including reinsurance). The Covered Agreement outcomes affirm the integrated U.S. 

system of state and federal insurance regulation, including the role of state insurance regulators 

as the primary supervisors of the business of insurance. 

The Covered Agreement addresses three areas of prudential insurance supervision: group 

supeiVision, reinsurance, and exchange of information between SUpe!Visory authorities. In 

general, the Covered Agreement terms apply on a mutual basis. The group supervision and 

reinsurance provisions are conditioned upon one another under the application provisions of the 

Covered Agreement Key provisions are summarized below. 

Group Suoervision 

Effective January I, 2016,the EU began applying a new insurance regulatory framework, known 

as Solvency U. that exposed non-EU insurers to uncertain, differential and costly regulatory 

2 
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50217013.eps

treatment if the insurer's countl)' of domicile is not determined by the EU to have a superviSOI)' 

system that is "equivalenf' to the Solvency n supervisol)' system. Specifically, under Solvency 

11, EU supervisors have the ability to apply solvency and capital requirements to the worldwide 

operations of any U.S. insurer operating in the EU, in addition to worldwide reporting and 

governance requirements. The Covered Agreement precludes EU insurance supervisors from 

exercising such authorities over the worldwide operations of U.S. insurers. Without the 

limitations on such worldwide superviSOI)' authority provided by the Covered Agreement, U.S.-

based insurers and reinsurers with EU operations would be subject to regulatOI)' burdens of 

Solvency ll 

Group supervision features of the Covered Agreement include (see Article 4 of the Covered 

Agreement): 

• The group supervision practices described in the Covered Agreement apply only to U.S. 

and EU insurance groups operating in both territories. 

• U.S. insuranoe groups operating in the EU will be supervised at the worldwide group 

level only by the relevant U.S. insuranoe supervisors. EU in.surers operating in the 

United States will be supervised at the world,vide group level only by the relevant EU 

insurance supervisors. 

• U.S. insurance groups operating in the EU will not have to meet EU world,vide group 

capital, reporting, or governance requirements. 

• With respect to risks from outside their territories that threaten operations and activities 

within their territories, supervisors in both the United States and the EU can request 

information from insuranoe groups from the Olher party, and take appropriate action 

within their territol)' to prOiect policyholders and financial stability. 

Subject to certain conditions, the Covered Agreement eliminates collateral and local presence 

requirements for U.S. reinsurers operating in the EU insuranoe marltet, and eliminates collateral 

and local presence requirements for EU reinsurers operating in the U.S. insuranoe market, as a 

condition for and in connection with regulatol)' credit for reinsurance. 

With regard to collateral requirements, the Covered Agreement builds on the reinsurance 

collateral reform adopted unanimously by U.S. state regulators in 2011 and implemented in 

many U.S. states. The Covered Agreement establishes financial strength and market conduct 

conditions that EU and U.S. reinsurers must meet in order to receive the benefits of the Covered 

Agreement. These requirements provide a substantially equivalent level of protection for ceding 

insurers and consumers to that which is currently provided by U.S. state laws regarding credit for 

reinsurance. Among other conditions, the Covered Agreement provides that an EU-based 

reinsurer will be eligible for collateral elimination in the United States if that reinsurer meets 

robust capital and solvency standards, and maintains a record of prompt payments to ceding 

insurers. 

2 

3 
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50217014.eps

While relief from reinsurance collateral requirements will reduce regulatory burde.ns for EU 

reinsurers operating in the United States, the Covered Agreement also relieves U.S. reinsurers 

from the obligation to establish a local presence-i.e., a branch or subsidiary- in the EU. 

Collateral in place and collateral requirements for current reinsurance agreements will not be 

affected. Collateral requirements will be eliminated only with respect to losses incurred and 

reserves reported related to reinsurance agreements entered into, renewed, or amended after the 

date that a state law or regulation conforms to the Covered Agreement. It is understood that 

changes to regulatory requirements for posting collateral would not apply to amended 

agreements unless such amendment constitutes a material change to the underlying terms of the 

agreement. Nothing in the Covered Agreement prevents parties to a reinsurance agreement from 

negotiating for the inclusion of collateral, or for renegotiating current agreements, as a 

commercial matter. 

Reinsurance features of the Covered Agreement include (see Article 3 of the Covered 

Agreement): 

• The U.S. states have 60 months (S years) to adopt reinsurance reforms removing 

collateral requirements for EU reinsurers that meet the prescribed consumer protection 

conditions. FlO will begin the process of making potential preemption determinations of 

state laws that are inconsistent with the Covered Agreement terms after 42 months. 

• For a U.S. or EU reinsurer, conditions regarding financial strength, market conduct (e.g., 

whether the reinsurer pays claims promptly), and reponing requirements are the bases for 

relieffrorn collateral and local presence requirements, Failure to meet these conditions 

and requirements can result in the reimposition of collateral or local presence 

requirements. Other conditions for reinsurers include consent to service of process and 

con1mitment to the payment of final, enforceable judgments. 

• Within 24 months, EU Member States will revise existing laws so that U.S. reinsurers 

can operate in the EU without establishing a branch or a subsidiary. For those U.S. 

reinsurers that have not yet established a branch or subsidiary but have been operating in 

the EU, Iocal presence requirements will not be imposed. 

Exchange of.lnforrnation 

The Covered Agreement encourages, in a non-binding manner, insurance supervisors in the 

United States and the EU to share information. To suppon such information exchange, an annex 

to the Covered Agreement includes model provisions for a memorandum of understanding on 

information exchange that insurance supervisors are encouraged to adopt. 

Implementation and Application of the Covered Agreement 

The EU Member States will apply the group supervision practices described in the Covered 

Agreement following signature and the Parties' internal processes required for "provisional 

4 
60 


50217015.eps

application" of lhe agreeme11t before it e11ters into force. This is anticipated to take 

approximately 3 months. 

The Covered Agreeme11t includes provisions to ensure adherence to Covered Agreement terms 

and a mechanism for lhe United States and lhe EU to consult as needed. The Covered 

Agreement sets out, on a provision-by-provision basis, specific timelines for implementation of 

the Agreeme11t and also establishes conditionality between provisions to avoid lhe possibility that 

one Party could provide benefits while the other fails to do so. For example, the United States 

would not be required to implement the reinsurance collateral elimination provisions of the 

Covered Agreement if the EU fails to comply with the terms of the Agreement on group 

supervision and local presence. Similarly, the EU could re-apply Solvency U group supervision 

requirements to U.S. insurers' worldwide operations ifthe United States does not complete lhe 

necessal)' reinsurance reform within five years. These conditions are established with the aim of 

ensuring full and timely implementation on both sides. 

After five years, when each side has successfully completed its reinsurance reforms and applied 

group supervision practices consistent with the Covered Agreement, it is expected the outcomes 

of the provisions 1vill become the steady state between the United States and lhe EU. 

Use of this Fact Sheet 

This fact sheet is for informational use only, and is not a legal document. This fact sheet should 

be reviewed in conjunction with the Covered Agreement, which represents the final legal text 

negotiated between the Parties, and contains important legal conditions and other terms that are 

not summarized above. 

4 

5 
61 


50217016.eps

EN 

EUROPEAN 

COMMISSION 

Brussels, 4.4.2017 

COM(2017) 165 final 

2017/0076 (NLE) 

Proposal for a 

COUNCIL DECISION 

on the signing, on behalf of the European Union, and provisional application of the 

Bilateral Agreement between the Europe.an Union and the United States of America on 

pnodential measures regarding insurance and reinsurance 

EN 

6 
62 


50217017.eps

EN 

EXPLANATORY MEMORANDUM 

I. CONTEXT OF THE PROPOSAL 

Reasons for and objectivts of the proposal 

This proposal derives from a Council decision of 21 April 20151 pursuant to which the 

Commission was authorised to start negotiations with the United States of America (US) for 

the conclusion of an Agreement on insurance and reinsurance. Pursuant to this decision and 

the negotiating directives, the European Commission negotiated a Bilateral Agreement with 

the US on prudential measures regarding insurance and reinsurance in the course of2016. 

This Bilateral Agreement covers three areas, group supervision, reinsurance and exchange of 

information between supervisors: 

- It sets out the conditions for group supervision in both Parties of their respective insurance 

and reinsurance groups. EU and US insurance and reinsurance groups active in both 

jurisdictions will not be subject to certain requirements with respect to group supervision for 

their worldwide activities, but supervisors retain the ability to request and obtain information 

about worldwide activities which could harm policyholders or financial stability. 

- It lays down the prudential conditions to be applied for the removal of local presence and 

collateral requirements for reinsurers regulated and supervised in the other Party. 

- It contains provisions and, in an annex, a model memorandum of understanding for the 

exchange of information between supervisory authorities in the EU and the US. Supervisory 

authorities will be encouraged to use these provisions to ensure a high standard of 

professional secrecy in any exchange of confidential information necessary for carrying out 

their general supervisory activities. 

The Agreement thereby lays down an appropriate prudential frantework to be applied to 

insurers and reinsurers from both Parties. 

This proposal for a Council Decision constitutes the legal instrument for the signature and 

provisional application of this Bilateral Agreement. 

Consistency with existing policy provisions in the policy area 

EU legislation in the area of insurance lays down a prudential framework for the protection of 

policyholders and for financial stability. This Agreement further contributes to ensuring a 

high level of policyholder protection in the EU, notably via increased cooperation and 

exchange of information between supervisors, whilst also ensuring that both Parties' duly 

regulated and supervised insurance and reinsurance undertakings are not subject to undue 

burden. 

Council Decision authorising the opening of n:gotialions on behalf of the European Union with the 

United Scates of A..:ri(a for tl>e conclusion of anagn:en>ent on rcinslll3nce. 31 Malth 2015. ST 7320 

2015 1NIT. 

2 

7 

EN 
63 


50217018.eps

EN 

Consistency with other Union policies 

In line with the objectives of the Investment Plan for Europe and the Capital Markets Union, 

this Agreement will facilitate investment by reinsurers2

• 

This Agreement is without prejudice to negotiations on a Transatlantic Trade Investment 

Pannership with the US. 

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONA LITY 

Legal basis 

The legal basis for the Union to act is Anicle 207 TFEU read in conjunction with Anicle 

218(5) TFEU. 

Subsidiarity (for non-exclusive competence) 

This initiative falls under the exclusive competence of the Union. The subsidiarity principle 

therefore does not apply. 

Proportionality 

This EU action, laying down prudential rules for insurers and reinsurers, is in line with the 

principles of Directive 2009/138fEC of the European Parliament and of the Council3 

('Solvency II") and does not go beyond what is necessary to achieve its aims. 

3. STAKEtiOLOERCONSULTATIONS 

Stakeholder consultations 

The negotiations were conducted in consultation with Member States through the relevant 

Council special comminee (the Council Working Pany on Financial Services)' and Member 

States were regularly informed about the progress of the negotiations. The European 

Parliament has also been informed about the progress of the negotiations5

• 

Industry stakeholders on both sides have voiced their suppon for this Agreement and in 

panicular with respect to the supervision of cross-border insurance and reinsurance groups 

and for the removal of reinsurance collateral requirements. 

Collection and use of expertise 

Prior to the stan of this negotiation, the EU and the US have been closely following 

developments in each othets jurisdictions, exchanging information on regulatory 

developments, and have identified specific aspects of each other's regulatory systems as 

potentially problematic for insurers or reinsurers operating in the other jurisdiction. 

EU reinsurers estimate thalthey have about $~0 billion of collateral posled in the USA. which could be 

used roore effe<~ ve~· in other in~~stme.nt~ 1110 opponunity cost is estimated at around $tOO million 

per year. 

OJ L m. 17/1212009. p. I. 

The Council Special Commiuee was consulted on I~ Matth. 13 June. 29 June. 7 September. 30 

Sepcember. 18 Oclober. 9 November. 29 November. 9 December. 16 Decen'ber and 19 December 2016 

as well as on 10 Jaooary 2017. 

The Chair and Members of the European Parliameru's ECON Co1mtliuee 11 ett debriefed in camera on 

29 June. II October. 16Novemberand 30 November2016. 

8 

EN 
64 


50217019.eps

EN 

This was in particular conducted through the EU-US Dialogue project, which brought 

together EU and US officials as well as EU and US supervisory authorities. 

The European Insurance and Occupational Pensions Authority participated as an observer to 

these negotiations. 

4. BUDGETARY IMPLICATIONS 

No impact on the EU budget. 

5. OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

The Agreement provides for the set-up of a Joint Committee, which will provide a forum for 

the EU and the US to consult and to exchange information on the administration of the 

Agreement and its proper implementation. 

Member States will also need to undertake the necessary actions to ensure implementation of 

this Agreement. 

Detailed explanation of the specific provisions of the proposal 

Article I sets out the objectives of this prudential Agreement between the EU and the US, in 

the areas covered by the Agreement. Article 2 sets out the definitions that apply for this 

Agreement. 

Articles 3 and 4 concern respectively reinsurance and group supervision. After full application 

of this Agreement, reinsurers of one Party operating in the other Party will not be subjected to 

any requirement to post collateral or to establish a branch or subsidiary, if they meet the 

prudential condilions laid down in the Agreement, and insurance groups of one Party 

operating in the other Party which meet the conditions will not be subjected to a requirement 

to carry out a group solvency calculation for their worldwide activities nor to other aspects of 

group supervision for their worldwide activities. Supervisors can exercise group supervision 

on groups established within the territory of their Party, and can require information to be 

provided about worldwide activities which risk seriously harming policyholders in their 

jurisdiction or threatening financial stability, or seriously harm the capacity to pay claims. 

Articles 5 and 6, and the Annex, concern exchange of information between supervisors, 'vith 

the commitment for both Parties to encourage supervisors to cooperate in exchanging 

information for purposes directly related to the fulfilment of their supervisory functions. 

Furthermore, the Agreement provides for the setting up of a Joint Committee to discuss the 

application and implementation of the Agreement under Article 7, and Articles II and 12 

provide that the Parties can amend or terminate the Agreement, provided the conditions and 

procedures set out in those Articles are fulfilled, including mandatory consultation for 

termination of the Agreement. 

Articles 8, 9 and 10 set out when the Agreement 'viii enter into force and become applicable, 

and they also provide for the provisional application of certain Articles of the Agreement. 

The Agreement essentially provides for three modes of application between the Parties: 

4 

9 

EN 
65 


50217020.eps

EN 

I. Full application of every Article of the Agreement, which starts on either the date 60 

months following the date of signature of the Agreement, or the date of entry into 

force of the Agreement, whichever is later, and - for Articles 3, 4 and 9 - provided 

the conditions set forth in Article 10(2)(b) are fulfilled. 

The Agreement remains in full application unless it is terminated in accordance with 

Article II. 

2. Where entry into force of the Agreement is prior to the date 60 months following 

signature of the Agreement, certain parts of the Agreement start to apply on earlier 

dates: 

Article 7 (Joint Committee], Article II [fermination and Mandatory Consultation] 

and Article 12 [Amendment), apply as from the date of entry into force of the 

Agreement. Article 4 is also to be applied from that date, in accordance with Article 

I 0(2)(a) by the EU, and on a best efforts basis for the US side. 

Article 3(1) and (2) apply with respect to EU reinsurers in a U.S. State as from the 

date of either the adoption by the US State of a measure consistent with those 

provisions, or the date at which any pre-emption determination becomes applicable, 

pursuant to Article 10(2Xd). 

Finally, Article 3(3) shall be implemented and applicable in the EU as from 24 

months after the date of signature, pursuant to Article 10(2Xg). 

3. Prior to the entry into force of the Agreement, certain parts of the Agreement will 

also be provisionally applied. This provisional application concerns the following 

Articles: 

Article 4, in accordance with Article I 0(2)(a), and 

Article?. 

Provisional application starts on the seventh day of the month follo\ving the date on 

which the Parties have notified each other that their internal requirements and 

procedures necessary for provisional application have been completed. It lasts until 

the date of entry into force of the Agreement (or until one Party notifies the other 

Party of its intention not to complete its internal requirements for the entry into force 

of the Agreement). 

Annex I of the Agreement contains detailed provisions for a Memorandum of Understanding 

for the exchange of information between supervisors, which the Panies shall encourage 

supervisors on both sides to follow pursuant to Article 6 of the Agreement. 

10 

EN 
66 


50217021.eps

EN 

2017/0076(NLE) 

Proposal for a 

COUNCIL DECISION 

on the signing, on behalf of the European Union, and provisional application of the 

Bilateral Agreement between the European Union and the United States of America on 

prudential measures regarding insurance and reinsurance 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, and in particular 

Article 207 read in conjunction with Article 218(5) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

On 21 Aprii201S, the Council authorised the Commission to open negotiations with 

the United States of America for an Agreement on reinsurance6

. The negotiations were 

successfully concluded by an exchange of letters between the lead negotiators on 12 

January 2017. 

The Agreement should be signed on behalf of the European Union, subject to its 

conclusion at a later date. 

In view of enabling the set-up of the Joint Committee under this Agreement, which 

will provide a forum for the EU and the United States of America to exchange 

information on the proper implementation of the Agreement and in order to allow for 

the implementation of harmonised practices by supervisory authorities in the EU as 

regards group supervision which are already possible under the current EU legal 

framework in this area, Articles 4 and 7 of the Agreement should be applied 

provisionally, 

HAS ADOPTED THlS DECISION: 

Article I 

The signing of the Bilateral Agreement between the European Union and the United States of 

America on prudential measures regarding insurance and reinsurance is hereby approved on 

behalf of the Union, subject to the conclusion of the said Agreement. 

The text of the Agreement to be signed is attached to this Decision. 

Council Decision authorising !he opening of n:golialions on behalf of the European Union with !he 

United Scates of A..:rka for tl>e conclusion of an ag<ee~l>eOI on reinsumnce, Jt March 2015. ST 7320 

2015 1NIT. 

6 

11 

EN 
67 


50217022.eps

EN 

Article 2 

The Council Secretariat General shall establish the instrument of full powers to sign the 

Agreement, subject to its conclusion, for the person(s) indicated by the negotiator of the 

Agreement. 

Article 3 

Articles 4 and 7 of the Agreement shall be applied provisionally in accordance with Anicles 9 

and IOoftheAgreement. 

Article~ 

This Decision shall enter into force on the day of its adoption. 

Done at Brussels, 

For the Council 

17.e President 

12 

EN 
68 


50217023.eps

fdl(i iN~~h N.nlonal Association of POLICY 

lnsuran<e(ommissioners Gild RESEARCH 

July II, 2014 

Mr. Jonathan Faull 

Direcoor General, Internal Madcet and Services 

European Commission 

1049 Brussels 

Belgium 

Dear Mr. Faull: 

Thank you for your letter of June 6• reganling your views on the "Way Forward Project" and for your assessment 

of the US regulatory S)'Slem in the conte~1 of the Solvency 2 equivalence requirement 

We agree that the Project has been useful in terms of enhancing mutual unde~ding of the US and EU 

regulatory systems. As our collective jurisdictions represent nearly two-cbirds of the global insurance madcet, 

shared confidence in our different regulatory approaches is important 10 reinforce the transadantic insurance 

madcet and ensure effective cross border supervision of global firms. 

As you know, U.S. Slate insurance regulaoors are not pursuing an equivalence determination. While it is possible 

to compare our respective statutory autborities on paper, it would be cllallenging to conduct a comprehensive 

comparison of our two regulator)' S)'Slcms in practice until Solvroey 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 syscems, but we continue to believe 

that the US regulatory syscem results in outcomes for insurers and policyholders that we hope Solvency 2 \\ill 

achieve once it is fully implemented. This belief is based on real experience during periods of recession and great 

stress, bard and soft madcets, low interest rates, and increasing frequency and se1•erity of catastrophic cmts. 

lm:~tive of those vic"'• any inflexibility in the equivalence process that precludes the Commission from 

reaclling a similar conclusion about the efficacy of our s~'Stem is entirely self-imposed. Equivalence is a function 

of European law subject to the Commission's imerpretation, so in lieu of delineating changes to the US 

supe11isory system that by all accounts is among the mosc effective in the world, the Commission should instead 

reevaluate whether the equivalence mandate deserves 10 be reconsidered given its potential negative impact on US 

and European firms and policyholders. 

Sincerely, 

Membership of the NAIC lntcmationallnsurance Relations Leadership Group 

~ Senator Ben Nelson 

NAICCEO 

~/- Adam Hamm, Olair 

NAIC President 

North DakOI.llnsurance Commissioner 

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13 
69 


50217024.eps

July3, 2014 

Page2 

Mooica J. Lindeen, Vice Cl>air 

NA!C President·Elect 

Commissioner, Montana Securities and Insurance 

~P.~oAk. Sharon P. Clade 

NAIC Secretary-Treasurer 

Kentucky Dcpaltment of Insurance 

cfrUJ.¥rfsJoscph G. Murphy 

Comntissioner, Massadlusens Division of Insurance 

/]......~~-;c.­

Bruce R. Ramge 

Director, Nebraska Department of Insurance 

Chester 

Acting Commissione

McPbcrson 

~ 

r 

D.C. llepartment of l!uurance, Securities and Banking 

lltc;~ 

Benjamin M. lawsky 

Supcrintl:ndent 

New York State Department of Financial Services 

~ 1ft ~.P4t 

Julie Mix McPeak 

Commissioner 

Tennessee Department of Commeree and Insurance 

Michael F. Consedine 

NA IC Vice President 

Pennsylvania Insurance Department 

~ Kevin M. McCarty 

Commissioner, Office oflnsurance Regulation 

--zr- ~~ John M. Huff 

Director, Missouri Department of Insurance 

(J:,(p;CA 

Gordon I. Ito 

Hawaii Insurance Commissioner 

~/]wlp/ 

--~;~cr 

Kansas Insurance Commissioner 

James J. Donelon 

Louisiana Insurance Commissioner 

LJW. 

Thomas B. Leonardi 

Conncctieut l!uurance Commi.ssioner 

14 
70 

PREPARED STATEMENT OF STUART HENDERSON 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, WESTERN NATIONAL MUTUAL INSUR- ANCE COMPANY, ON BEHALF OF THE NATIONAL ASSOCIATION OF MUTUAL INSUR- ANCE COMPANIES

MAY 2, 2017 

The National Association of Mutual Insurance Companies (NAMIC) is pleased to 

provide comments to the Senate Committee on Banking, Housing, and Urban Affairs on the recently completed U.S.–European Union (EU) covered agreement dealing with insurance regulation. We appreciate the Committee’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 

(Dodd–Frank) created a new office in the Department of Treasury called the Federal 

Insurance Office (FIO). 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, 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 FIO should exercise such authority only 

if they determine that extreme circumstances demand it, and then only after full 

and 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 FIO 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. 

The agreement had a 90-day layover period in Congress that ended April 13. This 

was intended to provide lawmakers the opportunity to review and provide comment 

on the agreement. However, the agreement does not require congressional approval. 

Treasury and USTR have not yet decided to sign the agreement or take other action. This 90-day period began to run 7 days before President Trump 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 hold off signing the agreement 

until important ambiguities are clarified. If these issues cannot be adequately resolved, the Administration should go back to the drawing board and secure a better 

deal. 

71 

1 November 20, 2015, letter 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. 

Covered Agreement Negotiations 

On November 20, 2015, the FIO 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 prior Administration, on Friday, January 13, 2017, the USTR and the FIO 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 if 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 through 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. Foreignbased reinsurers have long chafed at the requirement that they must post collateral 

in the U.S. to protect ceding insurers ability to collect when due reinsurance recoveries. This problem was addressed by the NAIC in their 2011 revised model Credit 

for Reinsurance Act. That model act 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 39 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 FIO 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 FIO 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. In exchange for the elimination of $40 billion of reinsurance collateral 

requirements for EU reinsurers, the EU has only agreed to return to the pre-Solvency II status quo when they were not unfairly punishing U.S.-based (re)insurers 

for the U.S. State laws. 

The Covered Agreement 

The covered agreement allows for a period of 5 years for each jurisdiction to revise 

laws and regulatory practice to 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 

72 

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: (1) what 

they can count on from the EU insurance supervisors; (2) if U.S. regulators will 

meet the obligations they were not involved in negotiating; and (3) whether they 

will be disadvantaged by one of the many exceptions to the agreement. These companies and those who represent them are ‘‘hopeful’’ things will work out, and they 

want to believe that everyone will abide by the intent of the agreement. NAMIC is 

not so optimistic. We believe we can only rely on the language within 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 enact laws and 

regulations reflecting this EU reinsurer zero-collateral requirement within 5 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-in the U.S., both small and 

large, 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 pay the money owed to policyholders in a timely fashion in the 

event of natural catastrophes or other large loss events. The elimination of required 

collateral particularly disadvantages smaller insurers that are more reliant on reinsurance. And though the agreement provides no prohibition on negotiating for collateral in reinsurance contracts, 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, those benefits are exaggerated and 

in many cases lessened by the exceptions and ambiguous language in the document. 

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 law 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, or doesn’t decide to add, a similar requirement for the domestic EU companies. In addition, it is important to note that if the agreement fails or terminates, 

EU supervisors will be able to undo forbearance of these local presence demands, 

while the revised State laws/regulations eliminating reinsurance collateral will have 

to be repealed by all State legislatures. 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, and the U.K. is positioning themselves for a similar agreement 

after Brexit removes them from the EU. This could be the beginning of zero collateral for all non-U.S. reinsurers. This would ignore the work State regulators and 

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-nine 

States have already acted to enact this NAIC model and those remaining States 

need to enact the revised model before 2019 to retain their NAIC accreditation. 

73 

Group Supervision 

The covered agreement also addresses group supervision and group capital requirements. This issue was added to the covered agreement by the U.S. in order 

to gain acceptance of the existing U.S. 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, with exceptions. 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 at the end of 5 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 FIO, 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 

74 

2 Ibid. 

3 Ibid. 

State; and (B) is inconsistent with a covered agreement. (31 uses 

§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 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 road—after the U.S. has already enacted difficult to reverse changes 

to State insurance law and regulation. 

Process Concerns 

NAMIC has serious concerns about both 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 FIO. 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 FIO 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 add to the perception that this is intended to be an ongoing evaluative process 

with 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 new group supervision 

and future regulatory uncertainty. It is also a bad deal for consumers in America 

who ultimately pay for 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, those companies threatened by increased 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, it might 

involve negotiating a mutual recognition provision in a future trade agreement or 

at least clarifying the intention of the covered agreement to provide such recognition. NAMIC believes that the U.S. ought to be able to request new language in the 

agreement or at least letters clarifying the intention of the agreement to assure our 

insurance and reinsurance markets can continue to function without unfair barriers 

to trade. 

In the end, if necessary, Congress should not hesitate to urge the Trump administration to go back to the drawing board and secure a better deal. A real solution 

must meet the needs of the insurance-buying public, the insurance industry, and 

State regulators—the current covered agreement does not meet those needs. NAMIC 

75 

appreciates the opportunity to testify and looks forward to working with the Committee going forward. 

PREPARED STATEMENT OF DAVID ZARING 

ASSOCIATE PROFESSOR OF LEGAL STUDIES AND BUSINESS ETHICS, THE WHARTON

SCHOOL, UNIVERSITY OF PENNSYLVANIA

MAY 2, 2017 

I am an associate professor of legal studies and business ethics at the Wharton 

School. I study financial regulation and, in particular, international financial regulation, a field of growing importance and one that has already transformed the way 

that banks and capital markets are regulated. It is a field of increasing importance 

to insurance as well. 

Overview 

In my testimony today on the covered agreement between the United States and 

the European Union, I would like to focus on three points. 

First, the covered agreement grew out of an effort in the wake of the financial 

crisis to improve the regulation of financial companies, including insurance companies, given the repercussions of the failure of the large insurance company AIG during that crisis. For insurance, that effort has involved a number of different channels. The goals have been twofold. One has been to make sure that globally active 

insurance companies are sensibly regulated as whole enterprises, rather than as a 

series of operating subsidiaries in a variety of different jurisdictions. The second has 

been to insure that internationally active insurance companies have faced a level 

playing field when it comes to doing business at home or overseas. 

The covered agreement complements efforts to reduce nontariff barriers through 

trade agreements and efforts to increase the quality of global insurance supervision 

through organizations like the International Association of Insurance Supervisors 

(IAIS). It offers the reduction of two barriers to trade and two regulatory agreements that will improve the supervision of insurance conglomerates in both the 

United States and Europe, serving objectives identified by regulators and trade negotiators in the wake of the financial crisis. 

Second, the agreement deepens cooperation through the exchange of information, 

includes a deal on reinsurance that reduces trade barriers in both the United States 

and the European Union, and provides a sensible framework for the supervision of 

insurance conglomerates as groups. As a matter of content, it is likely to be good 

for insurance companies and consumers. In addition, it rationalizes the supervision 

of insurance companies by looking at the totality of their operations, just as banking 

supervisors do when it comes to banking financial conglomerates. 

Third, the critics of the transparency of the process in concluding the covered 

agreement are misguided. The United States never hid the fact that it was engaging 

in negotiations with the European Union, and now that the result of those negotiations have been made public, the covered agreement is being appropriately reviewed 

by Congress and by stakeholders. That is the right way to contact transparent international processes: congressional approval to engage in international negotiations is 

given beforehand, and the results of those negotiations are reviewed after the fact. 

Requiring more and different consultations during the negotiations would be both 

inconsistent with the way negotiations work and entirely unnecessary process. 

More generally, international regulatory cooperation is not easy, and must be 

paired with procedural protections, but the United States cannot ignore the efforts 

and interests of foreign regulators. The global effort to create a single common set 

of accounting standards exemplifies the risks of failing to engage. The United States 

stayed out of that process, but the resulting International Financial Reporting 

Standards have now been adopted by essentially every jurisdiction in the world but 

one—and the Securities and Exchange Commission is now accepting IFRS for foreign filers. This country can take a leadership role in devising international regulatory standards, or it can let others develop the standards, and adopt them later. 

But it cannot ignore them. 

The Context for the Covered Agreement Between the U.S. and EU 

Before the financial crisis, insurance companies were thought to be relatively safe 

financial intermediaries. They were regulated, especially in the United States, more 

to ensure that they did not deceive consumers, rather than for the danger that they 

would collapse and create risks for the financial system. That perspective made 

sense in most contexts; insurance companies are less susceptible to bank runs or 

the sort of operational risks posed by rogue traders or flash crashes that may roil 

76 

1For a discussion, see Robert McDonald and Anna Paulson, ‘‘AIG in Hindsight’’, 29 J. Econ. 

Persp. 81 (Spring 2015). 2For a further discussion of the AIG problem, see Daniel Schwarcz, ‘‘A Critical Take on Group 

Regulation of Insurers in the United States’’, 5 UC Irvine L. Rev. 537 (2015). 3 31 U.S.C. §313(c). 

the financial and capital markets. State insurance commissioners have traditionally 

led the way in this oversight. 

However, the financial crisis exemplified the ways that, as insurance companies 

have taken on more varied operations, their conduct can threaten the stability of 

the system. Most notably, this occurred in the case of the insurance giant American 

International Group, one of the largest companies in the country. As you all know, 

it collapsed in 2008. AIG provided all sorts of insurance to policyholders all over the 

world. But its diverse array of products proved to be its undoing; AIG was ruined 

by a combination of the entry into a new quasi-insurance market, and the dependence on a securities lending program that dried up just as the new business started 

to fare disastrously. 

The new business was run out of AIG’s London subsidiary, AIG Financial Products. AIG–FP wrote insufficiently hedged credit default swaps, bolstered by the 

strong balance sheet of the larger insurance firm. As the credit crisis worsened, AIG 

had to post more and more collateral to satisfy its counterparties that it would make 

good on the credit protection contracts it had written. Eventually the need to post 

ever more collateral rendered the company essentially insolvent, with a large proportion of its assets encumbered. Some accounts put the losses on this credit insurance at $30 billion. 

To make matters worse, AIG’s securities lending business collapsed at the same 

time and for largely the same reason: the collapse in mortgage backed-securities 

markets. Companies like AIG that hold a lot of securities against the insurance policies written by their operating subsidiaries often lend the securities out in exchange 

for cash collateral. When they do so, they typically take that cash collateral and invest it in something short term and relatively safe. But AIG invested in riskier assets, including assets backed by subprime residential mortgage loans. When the financial crisis began to deepen, and borrowers returned their securities, seeking the 

cash collateral, AIG found itself unable to liquidate these assets quickly, at the price 

the firm expected to receive. Estimates at the losses due to this securities lending 

have placed that deficit at around $21 billion. 1

The result was that a famously careful American insurer that served different 

customers across the world was undone by one relatively small London subsidiary, 

which, it turned out, was not being carefully overseen by British insurance regulators, the New York insurance commissioners who oversaw the center of the firm’s 

operations, or the Office of Thrift Supervision, which oversaw AIG to the extent that 

the conglomerate served as a holding company of a thrift subsidiary. Its overseers 

had also not realized that it had found its way into a runnable market through its 

securities lending business. The securities held by its insurance subsidiaries had 

been lent out through a process centralized through a noninsurance, securities lending-focused subsidiary. 

Both disasters, which hit AIG at the same time, posed problems that the company’s insurer supervisors were ill-equipped to solve or even recognize in part because they did not subject the firm to meaningful consolidated, or group level, supervision. 2 Instead the various subsidiaries of AIG were parceled out as the responsibility of various regulators, with little effort made to coordinate that supervision. 

The AIG experience, and the financial crisis in general, changed the way that 

oversight over nonbank financial companies was allocated between the States and 

the Federal Government, particularly with regard to the effort to create international standards. Title V of the Dodd–Frank Wall Street Reform Act created the 

Federal Insurance Office (FIO) within the Department of Treasury. That office has 

limited powers, especially domestically, where insurance supervision remains the 

province of the State insurance commissions. FIO has nonetheless been charged 

with a particularly important outward-facing role. It has unique international responsibilities: Congress instructed it ‘‘to coordinate Federal efforts and develop Federal policy on prudential aspects of international insurance matters, including representing the United States, as appropriate, in the International Association of Insurance Supervisors;’’ (IAIS) to ‘‘consult with the States (including State insurance 

regulators) regarding insurance matters of national importance and prudential insurance matters of international importance;’’ and to ‘‘advise the [Treasury] Secretary on prudential international insurance policy issues.’’ 3

77 

4 31 U.S.C. §313(r)(2). 5GATT Article III. 

6 A further discussion of this point may be seen in David Zaring, ‘‘Finding Legal Principle 

in Global Financial Regulation’’, 52 VA. J. Int’l L. 685, 707 (2012). 

It also has been given the power, in association with the United States Trade Representative, to conclude agreements on insurance regulation with foreign counterparties. 

These so-called covered agreements are defined in Dodd–Frank as 

a written bilateral or multilateral agreement regarding prudential measures with respect to the business of insurance or reinsurance that is 

(A) entered into between the United States and one or more foreign Governments, or regulatory entities; and 

(B) relates to the recognition of prudential measures with respect to the 

business of insurance or reinsurance that achieves a level of protection for 

insurance or reinsurance consumers that is substantially equivalent to the 

level of protection achieved under State insurance or reinsurance regulation. 4

These covered agreements are meant to both strengthen insurance regulation and 

level the playing field between the United States and other countries, and are 

meant to serve as a bilateral backstop for regulatory cooperation in cases where 

multilateral regulation has not made progress. An analogy might be drawn to this 

country’s approach to progress on reducing barriers to trade. When multilateral 

agreements like the Doha Round have foundered, the United States has increasingly 

looked to pursue its trade interests through regulation or bilateral trade and investment deals. In the case of post-crisis insurance supervision, the hope evinced in 

Dodd–Frank is that where multilateral efforts to either level the international playing field or to improve the supervision of systemically risky insurance companies 

has foundered, bilateral covered agreements might serve as a useful supplement. 

The work of IAIS continues and, of course, trade negotiations, on both the bilateral and a multilateral basis, are part of the mix that will affect the playing field 

on which insurers from a variety of different jurisdictions can seek to market their 

products to consumers both at home and abroad. 

In my view, the covered agreements occupies a place in the middle of these international efforts to solve some of the problems posed by the modern insurance market. On the one hand, trade negotiations are about reducing trade barriers and 

making it more possible for insurance companies to access foreign markets. Trade 

uses its national treatment principle to do so—that principle provides that members 

of the World Trade Organization ‘‘shall accord to the nationals of other Members 

treatment no less favorable than that it accords to its own nationals’’ for a variety 

of products and services. 5 The goal is to remove discriminatory regulation of foreign 

imports as much as possible. 

The IAIS efforts are also designed to level the playing field when it comes to the 

supervision of insurance companies. Here, the effort is not so much to remove regulations as it is to improve them. International financial regulation through a network like IAIS in this way has a harmonizing purpose just like trade agreements, 

but IAIS seeks to bring regulatory standards in member countries up to a more intensive standard, with national treatment serving as both a justification (we must 

measure up to the other members of the network in our treatment of our insurers) 

and a caution (we must treat our insurers the same way we treat foreign insurers) 

for more intense oversight. 6

In the wake of the financial crisis, IAIS, and the coordinator of financial oversight, the Financial Stability Board, under instruction from the G20, has taken new 

steps to create consistent global standards for supervisors designed to improve the 

safety and soundness of financial firms, including capital standards and group 

standards. 

Efforts to create international insurance standards make sense as American firms 

increasingly enter foreign markets, and foreign firms enter the American one. Common standards level the playing field, and invite the sort of competition that can 

only benefit insurance consumers. And in a world where an insurance group can be 

destabilized by a faltering subsidiary in a single country, the value of coordinated 

supervision is obvious. 

Nonetheless, international processes are almost by definition more difficult to follow than domestic ones. IAIS and the FSB have taken, often at the behest of American regulators, steps towards improving their transparency. They have websites, 

they issue consultative documents and accept comment upon them, and they hold 

78 

increasingly open annual meetings. And the IAIS has usefully dropped the very high 

fee it required of those who hoped to attend its annual meeting. But transparency 

should not be viewed as requiring that any and every interested party be able to 

attend any meeting at any moment. No business works that way, and nor does any 

agency. Policymaking requires opportunities for deliberation, and the importance of 

a role for deliberation should not be gainsaid. 

The covered agreement between the United States and the European Union occupies a middle ground once this context is taken into account. On one hand, the portion of the agreement that deals with reinsurance reduces trade barriers in both the 

European Union and the United States. On the other hand, the group supervision 

agreement improves the quality and consistency of the supervision of insurance conglomerates by encouraging regulators to assess the solvency and capital adequacy 

of insurance companies at the group level, rather than solely at the operating subsidiary level. 

Finally, I think it would be remiss not to observe that the agreement provides for 

an information exchange that is likely to deepen the contacts between regulators in 

the U.S. and EU in a way that will be a great benefit the next time that a large 

insurance company runs into financial trouble. 

The Content of the Covered Agreement 

Once the context of the covered agreement is understood, its content makes a 

great deal of sense. 

The reinsurance portion of the agreement reduces trade barriers in both the 

United States and the European Union in a way likely to benefit American consumers. I therefore view it as something like a trade deal, contained within the 

more narrow confines of a limited agreement on international insurance regulation. 

In particular, the requirement that foreign reinsurance firms post 100 percent collateral to do business in certain American jurisdictions makes little sense for well 

supervised European reinsurers. This problem has been apparent for years, and yet 

any reduction in the collateral requirements, which thereby would open up the U.S. 

reinsurance market and introduce new competitors, to the benefit of insurance companies and ultimately consumers, has been slow. 

The agreement would prevent U.S. State insurance regulators from requiring EU 

reinsurers to post such high levels of collateral as a condition for U.S. firms to be 

credited for their contracts with EU reinsurers. These provisions do not limit the 

power of American regulators to apply requirements for entering into reinsurance 

agreements. The Treasury Department views this requirements as one that builds 

on the reinsurance collateral reform adopted unanimously by U.S. State regulators 

in 2011 and implemented in many, but not all, States. I am inclined to agree. 

In addition to improving the reinsurance market, the rationalization of reinsurance collateral requirements will likely help the United States as it pursues further 

nontariff barrier concessions from the European Union. The participation of the 

USTR in the negotiations over the covered agreement underscores the relevance of 

the reinsurance arrangements for the more general reduction in trade barriers on 

both sides of the Atlantic. 

The United States also got something for American reinsurance companies as 

well. One of the covered agreement’s objectives, as announced in its Article I, is ‘‘the 

elimination, under specified conditions, of local presence requirements.’’ Specifically, 

the agreement relieves U.S. reinsurers from the obligation to establish a local presence—i.e., a branch or subsidiary—in the EU. The local presence requirement in the 

EU was also a real burden on the ability of American reinsurers to access that market. The elimination of that burden will level the playing field for American and European reinsurance firms by making it easier for American reinsurers to access the 

European market without opening an office in every jurisdiction in which they do 

business. 

The agreement also contains provisions on group supervision. Under the EU’s 

‘‘Solvency II’’ regime, European insurers are subject to group supervision, and foreign insurers seeking to do business in the EU are required to establish that they 

are supervised in a comparable way. Most worryingly for American firms, the EU 

reserved for itself the right to impose additional capital and other regulatory requirements on firms if its country of domicile was not determined by the EU to have 

a supervisory system that is ‘‘equivalent’’ to the Solvency II supervisory system. 

The covered agreement provides that this requirement will not be imposed upon 

American insurers doing business in Europe, provided that they can establish that 

they are being adequately supervised as groups. The agreement was in this way designed to ‘‘establish[] that the [American] supervisory authority, and not the [European] supervisory authority, will exercise worldwide prudential insurance group supervision,’’ as the agreement provides in Article I. It means that U.S. insurance 

79 

7For an overview of these rules, see Daniel Schwarcz, ‘‘A Critical Take on Group Regulation 

of Insurers in the United States’’, 5 UC Irvine L. Rev. 537 (2015). 8For more on this, see David Zaring, ‘‘International Institutional Performance in Crisis’’, 10 

Chi. J. Int’l L. 475, 485 (2010). 

groups operating in the EU will be supervised at the worldwide group level by the 

relevant U.S. insurance supervisors, rather than through a European process imposed on American insurers and based on Solvency II. 

Group supervision is, in my view, the appropriate way to supervise any large financial conglomerate. Banks are supervised at the holding company level by the 

Federal Reserve, and the single point of entry resolution scheme also looks to manage firms in crisis in a consolidated way. Dodd–Frank, in the way it treats nonbank 

subsidiaries of broker dealers and derivatives desks also looks to the group rather 

than the operating subsidiary in assessing systemic risk. 

The group supervision component of the covered agreement brings this sort of 

focus to insurance conglomerates, and appropriately so. I have observed that some 

of the problems posed by the supervision of AIG were likely attributable to the fact 

that its American regulators were not sufficiently focused on its London financial 

products affiliate, as well as on its non-insurance securities lending affiliate. It 

makes sense to assess the riskiness of an insurance company with a view to the 

whole insurance company, and not by only looking at its operating subsidiaries on 

a State-by-State basis. 

Moreover, it appears that the approach taken in group supervision of insurance 

conglomerates mimics the program that the National Association of Insurance Commissioners is already rolling out. State regulators used to regulating firms at the 

operating subsidiary level are unaccustomed to group supervision, and may not have 

the incentives to cooperate in a way likely to make group supervision successful. 

They are, however, beginning to address the issue with their ‘‘windows’’ and ‘‘walls’’ 

approach to groups. The ‘‘walls’’ of the State regulatory process are designed to ringfence individual regulated entities from various risks that may be associated with 

their affiliates or holding companies, and include rules requiring that insurers’ 

transactions with affiliates be on terms that are ‘‘fair and reasonable’’ and subject 

to regulatory disapproval. The ‘‘windows’’ of U.S. insurance regulation are designed 

to allow regulators of individual operating entities to assess potential risks from affiliates that may impact the operating entity. The ‘‘windows’’ provide regulators 

with financial information from any entity controlling the insurer, financial statements of all affiliates, and the right to acquire information seek further information 

about large risks faced by the insurance group. 7 The covered agreement recognizes 

this approach, as well as the Own Risk and Solvency Assessment used by State regulators, which would be shared with European regulators. 

Finally, the agreement provides for an information exchange that will amplify and 

improve contacts between regulators in the U.S. and EU. Over four decades of cooperation among central bankers and securities regulators has contributed to the capacity for the coordinated response that we have seen, to the degree that we have 

seen it, in the response to the last crisis, by both. In the midst of that crisis, the 

Securities and Exchange Commission coordinated its shorting ban with its international counterparts at an International Organization of Securities Commissions 

(IOSCO) meeting, even though the coordination was done in the hallways rather 

than during the official session. By the same token, the coordination of the injections of capital through swap lines and other mechanisms by the world’s central 

bankers was facilitated by their already extant supervisory cooperation. In other 

words, cooperation on matters of enforcement and understandings along those lines 

can create or further the relationships that can facilitate an international response 

to the next crisis. 8 That precedent is why I view the agreement on information exchange as a worthy and useful aspect of the agreement. 

Finding the Right Level of Transparency for the Covered Agreement 

How can we ensure that the sorts of international processes represented by the 

covered agreement have the right amount of accountability and democratic legitimacy? At best, Congress will begin the process by authorizing, or in some cases 

blessing, efforts at international regulatory cooperation. Second, the regulators will 

engage in that cooperation. And finally, regulators must come engage in a domestic 

administrative process. 

So far, this is the process that has been followed in the covered agreement. Congress gave Treasury and the USTR the power to negotiated covered agreements in 

Dodd–Frank. And American regulators participating in the process notified Congress and the industry before they began to negotiate an agreement with their European counterparts, and provided updates over the course of the negotiation. 

80 

Complaining about the transparency of the negotiations as they are happening is, 

in my view misplaced, provided there is a full and fair opportunity to review the 

product of those negotiations. This hearing is part of that review. Too many consultation or participation requirements limit the ability of negotiators to in fact negotiate. 

Finally, the text of the final agreement was sent to all of the relevant committees 

as required by Dodd–Frank. There is much process required before the U.S. can 

take action against any State that fails to bring its rules into line with the covered 

agreement: 

• No later than 42 months following execution of the Agreement, the U.S. must 

begin evaluating potential preemption determinations with respect to any State 

insurance measure that results in less favorable treatment of an EU insurer or 

reinsurer than a U.S. insurer or reinsurer in a manner inconsistent with the 

agreement. The U.S. has agreed to consider the States with the biggest reinsurance market first, and to finish within five years following execution of the 

agreement. 

• If it makes a preemption determination, Treasury must notify and consult with 

the State insurance regulator, take comment on the proposed determination, 

and give the State some time before finalizing preemption. 

• A State has the right to challenge that preemption determination in court. 

Covered agreements are meant to strengthen insurance regulation and level the 

playing field between the United States and European Union. There has been talk 

in the past about pre-conclusion publication requirements, or elaborate rounds of 

comment, sometimes involving congressional committees, before beginning the process of negotiating the agreement. But requiring draft agreements, or the American 

negotiating position, to be published in the Federal Register simply slows the process of implementing these agreements. It also suggests that the United States might 

not be able to live up to its bargains, which makes these agreements—which were 

blessed by Congress in Dodd–Frank—all the more difficult to conclude. It is also, 

for that matter, no way to conduct an international negotiation—you don’t reveal 

your hand before you head to the bargaining table. 

The Risks of Non-Participation: The International Accounting Standards 

Saga 

In my testimony, I have emphasized that international regulatory cooperation 

provides opportunities for American regulators to improve the stability of the financial system at home, and abroad, and therefore better meet their domestic regulatory mandates. I’d like to conclude with a cautionary tale about what can happen 

if American regulators reject an international process. 

The accounting story is particularly instructive. It is a cautionary tale for Americans because American regulators, by essentially abandoning an already ongoing 

harmonization effort in the 1990s, lost their ability to affect the effort, and now have 

had to begin the process of conforming to it. 

International accounting standards—the idea that companies listed on stock exchanges from Stockholm to Shanghai might report their results in the same way— 

have always been an attractive regulatory goal. In the 1980s, capital market regulators agreed to endorse an effort by professional accounting organizations to try for 

global harmonization of accounting rules. But the effort proved controversial, as 

American regulators comfortable with the unique American approach to financial 

statements withdrew their support for the enterprise in the early 1990s. 

That exit, however, did not stop the process of devising common accounting standards. Instead, the international efforts moved to Europe; the creation of international accounting standards after the SEC’s rejection of the prospect of them, has 

been managed by the International Accounting Standards Board (IASB), a public– 

private arrangement based in London created in 2001. The IASB has devised a set 

of accounting standards, the International Financial Reporting Standards (IFRS), 

which has enjoyed quick adoption in European and other countries. IFRS was essentially created without American participation. 

And therefore, perhaps unsurprisingly, IFRS is rather different from American accounting rules. It is a principles—rather than rules—based accounting system, in 

that it is less technical than traditional American accounting, and relies more on 

the gestalt of a company’s returns to assess its accuracy. The United States had— 

and, for the moment, still has—a unique rules-based and reputedly challenging set 

of accounting standards that differ greatly from those of any other Nation, the Generally Accepted Accounting Principles (GAAP). 

But, faced with a cascade of adoptions of IFRS, those GAAP principles have a very 

tenuous future, despite the SEC’s doubling down on their necessity in the 1990s. 

81 

As foreign jurisdictions have gained more and more of the business of floating stocks 

and bonds and raising capital, American capital market regulators have given up 

hope that they might do so in ways consistent with the complicated GAAP. The SEC 

has permitted foreign companies that list on American stock markets to use IFRS 

to file their American annual and quarterly reports. And the SEC will surely accede 

to IFRS eventually for all filers. 

Accounting is technical, and acronyms like GAAP and IFRS daunt almost as 

much as they reveal what, exactly, the distinction between rules-based and principles-based accounting really amounts to. But the import of the triumph of IFRS 

can be gleaned by abstracting away from it, and from the details of accounting. The 

commitment to an international effort in accounting has worked a sea change in the 

way that companies report their results, and the sea change has come without much 

American involvement—even though it will, in the near future, affect American 

companies as much as anyone else. 

Thus, this story of accounting standards illustrates what happens when international efforts are not pursued, even though safeguards on cooperation are important. Its propensity towards momentum is not a universal law, to be sure, but regulators ignore cross-border efforts at their peril, because those efforts can set the 

standards for even the most independent and recalcitrant jurisdictions, if the circumstances are right. 

Thank you. 

82 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM MICHAEL T. MCRAITH 

Q.1. There was some discussion during the hearing about potential 

opportunities to enhance the process for soliciting State insurance 

regulators and other stakeholders’ input in connection with future 

Federal Insurance Office-led negotiations of covered agreements. 

Could you describe with some additional detail how that process 

should be enhanced in future negotiations? 

A.1. Response not received in time for publication. 

Q.2. How should the Joint Commission process work to ensure that 

stakeholders’ input is considered in addressing any issues that 

might arise under this covered agreement? 

A.2. Response not received in time for publication. 

Q.3. Assuming the covered agreement is implemented by both the 

United States and the European Union without an exchange of letters or other comfort on the interpretative questions raised by the 

National Association of Insurance Commissioners and others, to 

what extent would the United States’ ability to terminate the 

agreement provide an effective means of mitigating risks to U.S. 

interests in the event that the European Union were to construe 

those interpretive questions against U.S. interests? 

A.3. Response not received in time for publication. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER 

FROM JULIE MIX MCPEAK 

Q.1. There was some discussion during the hearing about potential 

opportunities to enhance the process for soliciting State insurance 

regulators and other stakeholders’ input in connection with future 

Federal Insurance Office-led negotiations of covered agreements. 

Could you describe with some additional detail how that process 

should be enhanced in future negotiations? 

A.1. It isn’t clear that a covered agreement authority will be necessary for the future. The agreement with the EU was the product 

of fairly unique circumstances as the EU had something to give the 

United States in exchange for concessions by the United States, 

specifically addressing the disparate treatment that U.S. insurers 

were receiving by certain EU member countries under the Solvency 

II regime. 

With that stated, if the authority is to be preserved going forward, then we would suggest the following changes. First, State insurance regulators should be included in the negotiation process 

and should be able to consult with their general counsels and other 

pertinent department staff, as well as their fellow regulators. Unfortunately, during this negotiation, only a few of us were permitted to participate and we could not share information and obtain reactions from the other States. Second, there needs to be 

more stakeholder involvement throughout the process and formal 

mechanisms for doing so, including a notice and comment period on 

the proposed agreement and its framework. Last but not least, 

Congress should have more formal mechanisms for weighing in including voting on the proposed agreement. 

83 

Q.2. How should the Joint Commission process work to ensure that 

stakeholders’ input is considered in addressing any issues that 

might arise under this covered agreement? 

A.2. Along with other unknowns, the nature of the committee, its 

responsibilities and its membership should have been clearly 

spelled out in the agreement itself. 

Optimally, if a Joint Committee is to be convened to address interpretation issues, the process should be transparent and allow for 

the meaningful participation of State insurance regulators. While 

we would not expect all insurance regulators to be included in 

every meeting, there should be mechanisms by which all States can 

be consulted regarding the deliberations. Much of this agreement 

must be implemented by State insurance regulators, governors and 

legislators, and therefore the involvement of the States in the process to resolve disputes is critical. 

Q.3. Assuming the covered agreement is implemented by both the 

United States and the European Union without an exchange of letters or other comfort on the interpretative questions raised by the 

National Association of Insurance Commissioners and others, to 

what extent would the United States’ ability to terminate the 

agreement provide an effective means of mitigating risks to U.S. 

interests in the event that the European Union were to construe 

those interpretive questions against U.S. interests? 

A.3. We don’t think the threat of ending the agreement is an effective means of mitigating risks to U.S. interests. The key benefit to 

the agreement for the United States is resolving the disparate 

treatment that certain U.S. insurers are receiving from the EU. If 

we threaten to terminate the agreement, the EU will revert to 

their disparate treatment of our companies and the U.S. will not 

have achieved certainty and finality for the insurance sector. While 

some may argue that that the EU receives benefits such as the 

elimination of collateral, the U.S. stands to lose more if we wait to 

resolve any ambiguities through the Joint Committee. Over time, 

we could very well be in the position of having changed State laws 

in a manner that is favorable to the EU and not be able to easily 

or fully unwind the implementation that has already been undertaken by the States. If we terminate the agreement, the EU will 

preserve some of the benefits while the U.S. insurers operating in 

the EU could lose the main benefit U.S. negotiators obtained for 

them. We think the better approach is to resolve the ambiguities 

up front to avoid this situation and maximize the likelihood of finality and certainty for our sector. 

84 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

VIEWS OF THE CINCINATTI INSURANCE COMPANIES ON COVERED 

AGREEMENTS 


50217025.eps
85 


50217026.eps

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 UNNECESSARYTO 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 indude anyone representing state insurance 

regulatory authorities. 

NO MEANINGFUL CHECK & BALANCE BY CONGRESS. The law 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 Information Please (j)ntact: 

Scott A. Gilliam I Vice President I Government Relations I The Cincinnati Insurance Company 

6200 S. Gilmore Road, Fairfield, OH 45014 

Work: 513.870.28111 Cell: 513.607.57171 Fax: 513-881·8988 

Email: scott_gilliam@cinfin.com