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THE IMPACT OF DOMESTIC 

REGULATORY STANDARDS ON 

THE U.S. INSURANCE MARKET 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 29, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–53 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

BLAINE LUETKEMEYER, Missouri, Chairman 

LYNN A. WESTMORELAND, Georgia, Vice 

Chairman 

EDWARD R. ROYCE, California 

SCOTT GARRETT, New Jersey 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

DENNIS A. ROSS, Florida 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

ROGER WILLIAMS, Texas 

EMANUEL CLEAVER, Missouri, Ranking 

Member 

NYDIA M. VELA ́ ZQUEZ, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

JOYCE BEATTY, Ohio 

DANIEL T. KILDEE, Michigan 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

September 29, 2015 .......................................................................................... 1 

Appendix: 

September 29, 2015 .......................................................................................... 33 

WITNESSES 

TUESDAY, SEPTEMBER 29, 2015 

Huff, John M., Director, Missouri Department of Insurance, Financial Institutions, and Professional Registration, on behalf of the National Association 

of Insurance Commissioners (NAIC) .................................................................. 7 

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

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

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

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

Woodall, Hon. S. Roy, Jr., independent member, Financial Stability Oversight 

Council (FSOC) ..................................................................................................... 8 

APPENDIX 

Prepared statements: 

Huff, John M. .................................................................................................... 34 

McRaith, Michael .............................................................................................. 46 

Sullivan, Thomas .............................................................................................. 50 

Woodall, Hon. S. Roy, Jr. ................................................................................. 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written statement of the American Academy of Actuaries .......................... 63 

Written statement of the Independent Insurance Agents and Brokers 

of America ...................................................................................................... 68 

Written statement of the National Association of Mutual Insurance Companies ............................................................................................................. 72 

Written statement of the Property Casualty Insurers Association of 

America .......................................................................................................... 87 

Written statement of the National Association of Professional Insurance 

Agents ............................................................................................................ 95 

Posey, Hon. Bill: 

Written statement of the American Council of Life Insurers ....................... 99 

Written statement of the American Insurance Association .......................... 100 

Letter to Senator David Vitter from the California Department of Insurance, dated April 20, 2015 ............................................................................ 101 

Letter to Senator David Vitter, Senator Jon Tester, Representative Bill 

Posey, and Representative Brad Sherman from the Council of Insurance Agents & Brokers, dated April 21, 2015 ............................................ 102 

Written statement of the National Organization of Life and Health Insurance Guaranty Associations and the National Conference of Insurance 

Guaranty Funds ............................................................................................ 103 

Letter to Senator David Vitter, Senator Jon Tester, Representative Bill 

Posey, and Representative Brad Sherman from the Independent Insurance Agents and Brokers of America, the National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America, dated March 18, 2015 ....................................................... 105 

Page

VI 

Posey, Hon. Bill—Continued 

Letter to Senator David Vitter, Senator Jon Tester, Representative Bill 

Posey, and Representative Brad Sherman from the National Association of Insurance Commissioners and the Center for Insurance Policy 

and Research, dated March 18, 2015 .......................................................... 107 

Letter to Senator David Vitter, Senator Jon Tester, Representative Bill 

Posey, and Representative Brad Sherman from the National Association of Professional Insurance Agents, dated March 31, 2015 .................. 109 

Letter to Senator David Vitter, Senator Jon Tester, Representative Bill 

Posey, and Representative Brad Sherman from the National Conference 

of Insurance Legislators, dated March 18, 2015 ........................................ 110 

Huff, John M.: 

Written responses to questions for the record submitted by Representatives Sherman, Rothfus, Barr, Ross, and Luetkemeyer ............................. 111 

McRaith, Michael: 

Written responses to questions for the record submitted by Representatives Luetkemeyer, Sherman, Ross, Barr, and Rothfus ............................. 119 

Sullivan, Thomas: 

Written responses to questions for the record submitted by Representatives Luetkemeyer, Barr, Ross, and Rothfus .............................................. 130 

Woodall, Hon. S. Roy, Jr.: 

Written responses to questions for the record submitted by Representatives Ross, Rothfus, and Barr ...................................................................... 140 

(1) 

THE IMPACT OF DOMESTIC 

REGULATORY STANDARDS ON 

THE U.S. INSURANCE MARKET 

Tuesday, September 29, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING

AND INSURANCE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:05 p.m., in room 

2128, Rayburn House Office Building, Hon. Blaine Luetkemeyer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Luetkemeyer, Royce, Pearce, 

Posey, Stivers, Ross, Barr, Rothfus; Cleaver, Velazquez, Clay, 

Green, Moore, Ellison, Beatty, and Kildee. 

Chairman LUETKEMEYER. The Subcommittee on Housing and Insurance will come to order. 

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

the subcommittee at any time. Votes are scheduled in the 3:30 to 

4:00 range, so hopefully we will be able to get through everybody’s 

testimony and questions ASAP. So we are going to try to get going 

here as quickly as possible. 

Today’s hearing is entitled, ‘‘The Impact of Domestic Regulatory 

Standards on the U.S. Insurance Market.’’ Before we begin, I would 

like to thank the witnesses for appearing before the subcommittee 

today. I look forward to your testimony. 

I now recognize myself for 4 minutes to give an opening statement. 

Our Nation enjoys the most robust policyholder-centric insurance 

system in the world. The U.S. industry performed well during the 

financial crisis, and policyholders enjoy the safety and soundness 

that comes with our Nation’s unique regulatory structure. 

Despite its proven track record, the domestic regulatory landscape is being forced into significant changes. Today, we see more 

intrusion in insurance by not only the Federal Government but also 

international financial regulators. The Dodd-Frank Act has allowed 

that to happen through the creation of the Federal Insurance Office 

(FIO) and the powers granted to the Federal Reserve Board of Governors. The subcommittee has spent a great deal of time focused 

on international factors affecting our insurance impact. 

Thanks to Team USA, we have experienced some victories at the 

International Association of Insurance Supervisors (IAIS). The 

timeline for international capital standards has been extended, 

2 

which came as welcome news to this committee, and conversations 

seem to be pointing us in the right direction on accounting standards. 

However, the approach on the IAIS higher loss absorbency rule, 

or HLA, has created some alarm throughout the U.S. insurance 

space and has the potential to damage our domestic system. The 

proposal unjustly harms products relied on by millions of American 

consumers, an issue that must be addressed without delay. It is 

imperative that the United States press the IAIS and the Financial 

Stability Board to push back on this concept and work toward what 

should be the mission of Team USA to represent and advocate for 

the existing insurance regulatory regime. 

Today, we turn our attention to the many domestic pressures facing the industry. The designation of insurers as systemically important financial institutions (SIFIs) to the Federal Reserve’s rulemaking on insurance capital standards, it is essential that changes 

made to the regulatory landscape be done appropriately and in response to issues that pose risk to policyholders. That is particularly 

true of the Fed’s domestic capital standard. The standard should 

be done in close coordination with State insurance regulators and 

should be tailored to meet the unique model and needs of the 

United States, not based on international conversations or a desire 

to appease Federal and foreign regulators. 

There is a tremendous need for the Federal Reserve, which as a 

reminder is subject to congressional legislative action, to get this 

rulemaking right. It is imperative that the Fed develop a domestic 

standard first, then export it to the rest of the world. It is my hope 

that today’s discussion will also focus on the designation of insurers 

as SIFIs. The Administration has told this committee time and 

time again that the decisions on these designations were not born 

of international conversations and were made based on the extensive research and actual risk posed to the financial system. Yet insurance experts in this room, from whom we will receive testimony 

today, dissented and have in subsequent situations outlined their 

concerns over these designations. 

There are numerous other issues that have the potential to negatively impact the competitiveness of U.S. insurers. Despite statutory language that calls for a board to be established by April, we 

have yet to see any progress on the National Association of Registered Agents and Brokers Reform Act of 2015 (NARAB II). We 

continue to prop up a flood insurance program that doesn’t work, 

and are now requiring the insurance industry to comply with costly 

duplicative data requests at both the State and Federal levels. 

While some progress has been seen internationally, I fear that coordination and cooperation has stalled domestically. It is time that 

the witnesses appearing today work with Congress, industry, and, 

most importantly, each other to ensure that our domestic insurance 

system remains the most robust in the world. 

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

subcommittee, the gentleman from Missouri, Mr. Cleaver, for 5 

minutes for an opening statement. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

And to the other members of the subcommittee, good afternoon. 

I would like to begin by first thanking our witnesses for their apVerDate Nov 24 2008 14:43 Sep 15, 2016 Jkt 099751 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\99751.TXT TERI
3 

pearance here today, and I would like to issue a special welcome, 

of course, to John Huff from the great State of Missouri, which is 

preparing for an I-70 World Series. I am not saying the other 

teams are not important. They are just not winners. 

What I would like to do is welcome all of you, but obviously, I 

have a special appreciation for the Missourian. Today’s hearing will 

focus on domestic insurance issues. With the passage of the DoddFrank Act, the Federal Insurance Office (FIO) was also created. 

Among many things, this office monitors all aspects of the insurance industry and identifies any gaps that could contribute to the 

systemic crisis. 

The U.S. insurance industry is, of course, primarily regulated by 

States. However, the consequences of the 2008 worldwide economic 

crash revealed the extent to which our U.S. financial regulatory 

framework had allowed for supervisory gaps to exponentially grow. 

There was simply no single regulator responsible for understanding 

and supervising the enterprise as a whole. 

Though changes have been made to our insurance system as a 

whole, much of the State regulatory power remains. The FIO is not 

a financial regulator. They have been, as authorized by DoddFrank, working on a number of issues on the domestic level, many 

of which are referenced in their annual report on the insurance industry that was released yesterday. 

Overall, both the life insurance and property and casualty insurance sectors were profitable in 2014. Life insurance net written 

premiums totaled $648 billion in 2014, and property and casualty 

net written premiums reached $503 billion in 2014, which was a 

record high. 

I would like to again thank our witnesses for their participation, 

and I am eager for this conversation on domestic insurance issues 

to continue and that we will have a robust dialogue. 

Thank you very much, Mr. Chairman. 

Chairman LUETKEMEYER. Thank you, Mr. Cleaver. 

With that, we will begin the testimony. Today, we welcome Director Michael McRaith from the Federal Insurance Office, U.S. 

Treasury Department; Mr. Tom Sullivan, Senior Adviser, Department of Banking Supervision and Regulation, Federal Reserve 

Board of Governors; Mr. John Huff, Director, Missouri Department 

of Insurance, Financial Institutions, and Professional Registration, 

and president-elect of the National Association of Insurance Commissioners—obviously, Mr. Cleaver and I have a connection to Mr. 

Huff, and welcome him, with a special welcome—and the Honorable S. Roy Woodall, Jr., independent member, Financial Stability 

Oversight Council, U.S. Department of the Treasury. 

Gentlemen, thank you for being here this afternoon. We have a 

very distinguished panel, and I am excited to have you here with 

us. You will each be recognized for 5 minutes to give an oral presentation of your testimony. And without objection, your written 

statements will be made a part of the record. 

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

4 

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

Mr. MCRAITH. Chairman Luetkemeyer, Ranking Member 

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

me to testify. We released FIO’s 2015 annual report on the insurance industry yesterday: 2014 data showed the $8.3 trillion U.S. industry reported capital and surplus levels of approximately $1.15 

trillion. Total direct premiums collected in 2014 were a record high 

of $1.2 trillion, or roughly 7 percent of U.S. GDP. Just in the last 

10 years, U.S. premium volume has grown by more than $170 billion. 

At FIO, we are working to implement the reauthorized Terrorism 

Risk Insurance Act (TRIA), including working with stakeholders so 

that we can collect meaningful data in an efficient way. Industry 

continues to educate us about what data is available and in what 

format. We are also prepared to release soon a study on the TRIA 

certification process. FIO is also moving forward with monitoring 

the affordability and accessibility of personal auto insurance. We 

need a standard that makes sense from an insurance perspective, 

and stakeholder input has provided great insight. FIO also serves 

as a nonvoting FSOC member participating in the analysis of systemic risk and individual firms. In this work, we work closely with 

staff from other FSOC member agencies, including those represented on this panel. 

Our annual report also cites data showing that while U.S. premium volume increased in 2014, the U.S. share of the global insurance market declined from 27.5 to 26.8 percent. This development 

reflects both the continued vibrancy of the U.S. market, by far the 

world’s largest, and the increasing global growth opportunities for 

U.S.-based insurers. The globalization of the insurance market explains the increased focus on global standards, and for this reason, 

among others, FIO has a statutory role to coordinate and develop 

Federal policy on prudential aspects of international insurance 

matters, including representing the United States at the IIS. In 

this work, we collaborate extensively with our colleagues at the 

State level and at the Federal Reserve. 

Importantly, international standards are not self-executing in the 

United States. Federal and State authorities will study, test, and 

analyze the potential value and impact of any international standard prior to implementation. The United States has the most diverse and competitive insurance market in the world, with insurers 

operating in one part of one State and insurers that are multinational and engaged in a variety of financial services. 

With this in mind, we work with our U.S. and international 

counterparts to build a global consensus that works for the United 

States. In 2014, the IIS completed structural reform that improved 

the organization’s transparency, and we are pleased to note that in 

2015, stakeholders have already had more than 60 hours of public 

engagement with IIS members, far more than ever before. With 

open meetings available to all stakeholders, the IIS is better able 

to fashion fact-based standards. One such standard known as higher loss absorbency, or HLA, will be completed as an initial version 

5 

this year but subject to meaningful improvement in the coming 

years. 

We also hope to commence negotiations on a covered agreement 

soon. Before we do, we will notify and consult with this and other 

committees. We look forward to meaningful engagement with all 

stakeholders throughout the covered agreement process. Not a 

trade agreement, a covered agreement is an agreement between 

the United States and another country involving prudential insurance measures. Our objective will be to provide tangible benefits 

for the U.S. insurance industry and consumers. 

Through our respective roles at home and abroad, U.S. authorities will continue to provide leadership that complements our 

shared interests in a vibrant, well-regulated market that promotes 

competition and financial stability and that protects consumers. In 

all of our work, internationally and domestically, Treasury priorities will remain the best interests of U.S. consumers and insurers, 

the U.S. economy, and jobs for the American people. Thank you for 

your attention. I look forward to your questions. 

[The prepared statement of Director McRaith can be found on 

page 46 of the appendix.] 

Chairman LUETKEMEYER. Thank you, Director. 

Mr. Sullivan, you are recognized for 5 minutes. 

STATEMENT OF THOMAS SULLIVAN, ASSOCIATE DIRECTOR, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. SULLIVAN. Thank you, Mr. Chairman, Ranking Member 

Cleaver, and members of the subcommittee. I appreciate the opportunity to testify on behalf of the Federal Reserve. 

As a result of the Dodd-Frank Act, the Federal Reserve is responsible for the consolidated supervision of insurance holding companies that own an insured bank or thrift as well as insurance 

holding companies designated by the FSOC for Federal Reserve supervision. Insurance holding companies for which the Federal Reserve is the consolidated supervisor hold roughly $3 trillion in total 

assets, which is roughly one-third of the U.S. industry assets. 

These insurance holding companies vary greatly in terms of their 

size, the products they offer, and their geography. 

After passage of the Dodd-Frank Act, the Federal Reserve moved 

quickly to develop a supervisory framework that is appropriate for 

insurance holding companies that own depository institutions, and 

we promptly assigned supervisory teams to handle day-to-day supervision of each company. We have also acted promptly to commence supervision of three insurance holding companies designated 

by the FSOC for Federal Reserve supervision. Our supervisory 

teams are a combination of experienced Federal Reserve staff as 

well as newly hired staff with insurance expertise. We currently 

have approximately 90 full-time equivalent employees devoted to 

the supervision of insurance firms. Many of our supervisors are individuals with substantial prior experience in State insurance departments or the insurance industry. We plan to continue to add 

staff as appropriate to both the Board and the Reserve Banks to 

ensure that we have the proper depth and experience to carry out 

our mandates. 

6 

Our supervisory efforts to date have focused on strengthening 

firms’ internal controls, corporate governance, risk identification, 

measurement, and risk management. Our principal supervisory objectives are protecting the safety and soundness of the consolidated 

firms and their subsidiary depository institutions, while mitigating 

any risks to financial stability. 

Last year, Congress enacted the Insurance Capital Standards 

Clarifications Act, which amended the provision of the Dodd-Frank 

Act that had required minimal capital standards for banks to be 

applied to any insurance holding company supervised by the Fed. 

Using greater adaptability provided by this amendment, the Federal Reserve is now focusing on constructing a domestic regulatory 

capital framework that is well tailored to the business of insurance. 

We are exercising great care as we approach this challenging mandate. The Federal Reserve is investing significant time and effort 

into enhancing our understanding of the insurance industry and 

the firms we supervise. We are committed to tailoring our framework to the specific business lines, risk profiles, and systemic footprints of the firms we oversee. We have increased our staffing and 

have been engaging extensively with other insurance supervisors, 

experts, regulated entities, market participants and others, to solicit feedback on the various potential approaches of the development of an appropriate consolidated groupwide capital regime that 

would be consistent with Federal requirements. 

Our consolidated supervision and capital requirements will supplement existing legal entity supervision with a perspective that 

considers the risks across the entirety of the firm, including risks 

that emanate from noninsurance subsidiaries and other entities 

within a group. Our role as a consolidated supervisor does not seek 

to lessen the critical importance of supervising individual insurance legal entities by the States. We do not regulate the manner 

in which insurance is provided by these companies or the types of 

insurance products they provide. Those important aspects of the actual business of providing insurance are the province of the relevant State insurance supervisors. We conduct our consolidated supervision efforts in a manner that is complementary to and coordinated with other insurance regulators. We do this both informally 

and formally through mechanisms such as supervisory colleges. We 

also enter into agreements that allow us to share confidential information with State supervisors. 

An example of our collaboration with the States is evaluating a 

company’s own risk solvency assessment, or ORSA. Many States 

have enacted legislation that requires State-regulated insurers to 

produce this assessment on a groupwide basis. While we recognized 

that the ORSA process belongs to the lead State regulator, it is a 

potentially useful and valuable tool for us as well because it is 

fashioned on a groupwide basis. It has helped us to understand 

some of the institution’s processes for monitoring, measuring, controlling, and managing risks in a way that avoids unnecessary duplication in our oversight function. We have been meeting with 

State insurance departments to discuss views on ORSA submissions, and we have appreciated their perspective on these subjects. 

We will continue our active collaboration with State regulators. 

7 

Mr. Chairman, thank you for inviting me here today. I look forward to an active dialogue with committee members. 

[The prepared statement of Associate Director Sullivan can be 

found on page 50 of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Sullivan. 

Mr. Huff, you are now recognized for 5 minutes. 

STATEMENT OF JOHN M. HUFF, DIRECTOR, MISSOURI DEPARTMENT OF INSURANCE, FINANCIAL INSTITUTIONS, AND 

PROFESSIONAL REGISTRATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

(NAIC) 

Mr. HUFF. Good afternoon, Chairman Luetkemeyer and Ranking 

Member Cleaver. I appreciate the opportunity to testify today. As 

insurance markets grow more complex, State insurance regulators’ 

tools and priorities also evolve. While here in Washington, much of 

the focus has been on the uncertainty of the international landscape, the capital standards the Federal Reserve will impose, and 

the operations of the FSOC, State insurance regulators have been 

working through the open and transparent NAIC process to make 

significant improvements to key areas of insurance regulation. 

As my written testimony details, in the past few years State insurance regulators have made improvements to our Holding Company Act that enhance our ability to regulate interactions among 

insurance companies and other entities within a holding company 

system. We have begun implementing a principles-based reserving 

system that right-sizes reserves for life insurers and reduces the 

incentives for company workarounds, and we have enhanced the 

consistency and transparency of life insurer use of captive reinsurance that has been primarily used to address admittedly excessive 

reserving requirements for certain lines of life insurance. And we 

work to protect insurance consumers who have been victims of a 

data breach. 

In addition to these enhancements, State insurance regulators 

have reduced the collateral amounts of requirements for foreign reinsurance transactions in a measured and transparent manner. 

Historically, we required foreign reinsurers to hold 100 percent collateral on shore in the United States to protect U.S. consumers. Responding to concerns raised by foreign reinsurers and foreign governments, we are permitting collateral reductions if a reinsurer is 

in a solid financial health position and is overseen by an effective 

regulator in its home country. 

Today, 32 States have adopted proposed revisions representing 

more than two-thirds of premiums written in the United States 

across all lines of business. Five more States are considering similar proposals, which would raise this market share to about 93 percent. This is an excellent example of the States responding quickly 

to global market developments while preserving our focus on U.S. 

policyholder protection. Despite extensive State responsiveness, we 

understand that the Treasury Department and the USTR are preparing to start negotiations on a covered agreement with the EU 

to address further reduction of reinsurance collateral and resolve 

uncertainty arising from Solvency II. This Federal action could unnecessarily preempt State laws and our progress on reinsurance reVerDate Nov 24 2008 14:43 Sep 15, 2016 Jkt 099751 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\99751.TXT TERI
8 

forms. We have long contended that although our regulatory system is structured differently than Europe’s, it results in similar 

outcomes and should not be a basis for imposing duplicative regulation on U.S. insurers operating abroad. We question whether a covered agreement or any formal action by the Federal Government is 

necessary to resolve equivalence as it is clear that recognition can 

be achieved through other mechanisms. 

Before the Federal Government begins negotiating directly with 

a foreign government on an agreement that could preempt our 

State insurance laws, we do expect a clear and compelling case to 

be made for such drastic action. No such case has been made. And 

should Treasury and the USTR nevertheless move forward, State 

regulators should be at the table, directly involved in any discussions or negotiations to ensure our State regulatory system is not 

compromised. 

In 2010, I was selected to serve on the FSOC, and I served for 

two consecutive terms until September of last year. I continue to 

believe that the FSOC can be a robust vehicle for monitoring risks 

facing our financial system. However, FSOC has now voted twice 

to designate insurance companies over the objections of members 

who know the insurance industry best. Neither the designated companies nor the primary regulators have been given the insights 

necessary to de-risk these firms. This is unacceptable and contributes to rather than reduces risk to the financial system. 

If FSOC is unable or unwilling to change its process to develop 

an exit ramp for designated firms, we strongly urge Congress to do 

so. SIFI designations are not merely academic exercises. They will 

have real consequences for firms subject to the Federal Reserve’s 

new capital standards. NAIC supported legislation last year granting our colleagues at the Fed flexibility to apply capital rules consistent with the insurance business model and our legal entity regulation. For our part, State insurance regulators also support the 

need to assess the adequacy of an insurance group’s capital position as part of coordinated solvency oversight, and we are developing our own group capital calculation. 

In conclusion, State insurance regulators continue our efforts to 

improve regulation in the best interests of U.S. insurance consumers. State regulation has a strong 145-year track record of 

evolving to meet the challenges posed by dynamic markets, and we 

continue to believe that well-regulated markets make for well-protected policyholders. Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Huff can be found on page 34 of 

the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Huff, for your testimony. 

And Mr. Woodall, you are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE S. ROY WOODALL, JR., INDEPENDENT MEMBER, FINANCIAL STABILITY OVERSIGHT 

COUNCIL (FSOC) 

Mr. WOODALL. Thank you, Mr. Chairman, Mr. Ranking Member, 

and members of the subcommittee for inviting me to appear before 

you today. 

9 

As you know, I serve on the Financial Stability Oversight Council as the voting member with insight as to the insurance sector of 

our economy. The other voting members are Federal banking regulators, Federal market and housing regulators, and the Treasury 

Secretary. 

The work of the Council affects many aspects of the financial system, but most prominently with respect to our domestic insurance 

market has been the Council’s work in designating nonbank financial companies as systemically important financial institutions or 

SIFIs. It has been 7 years now since the financial crisis, 5 years 

since Dodd-Frank was passed, and to date the Council has designated only four SIFIs, three of which are insurance companies: 

AIG; Prudential; and MetLife. 

Upon designation as SIFIs, the insurance companies become subject to Federal supervision and regulation by the Federal Reserve 

Board of Governors. And as Tom Sullivan mentioned, this is regulation in addition to that of their primary regulators, our State insurance commissioners. Thus, the Council SIFI designations have 

impacted the regulatory framework of our domestic insurance market more than any other sector of the economy. But it was not the 

intent of Dodd-Frank that SIFIs be forever regulated by the Fed. 

Under Dodd-Frank, the Council has to reevaluate the SIFIs each 

year and then either confirm that they are still SIFIs or de-designate them. Dodd-Frank envisioned that over time the Council 

and regulators would supervise the SIFIs to eventually eliminate 

whatever systemic risks they posed to the U.S. system. 

As I explained in my written testimony, I was critical of the way 

in which the insurer SIFIs were designated. Dodd-Frank provides 

two tests for SIFI designation. Under one of the tests, the Council 

can presume that a company is under material financial distress, 

about to fail, and could pose a threat to the financial stability of 

the country. This is the only test by which all four of the SIFIs 

were judged. 

Under the other test in Dodd-Frank, the Council can look at the 

activities of the company, regardless of whether the company is 

about to fail, and then judge whether those activities are systemically risky and pose a threat to the financial stability of the 

United States. 

The Council used the material financial distress test in designating all three of the insurance companies as SIFIs rather than 

the activities test which, as I explained in my written testimony, 

I had advocated. 

Now I would like to focus on what comes next for the three insurance companies SIFIs. Had the Council used the activities test as 

I had advocated, it would have let the SIFIs, other companies, and 

regulators know what it was about the companies’ risk activities 

that needed to be addressed in order to remove whatever threat to 

the U.S. financial system the companies might pose. As a result of 

the Council’s failure to undertake this approach, the companies and 

their primary regulators are in the dark. 

It is my hope that the insurance SIFIs are not stuck in a ‘‘Hotel 

California’’ and that the Council will begin to provide guidance to 

the companies and their primary regulators as to what the companies can do to lessen their systemic risk footprint, and not just so 

10 

they can exit Fed supervision but so whatever systemic risk they 

pose can be mitigated and they will no longer pose a risk to the 

entire U.S. financial system. 

From my perspective, each year that a SIFI is, again, judged to 

still be a SIFI, it is no longer a reflection on that company. Rather, 

it becomes a measure of the success and effectiveness of the Council and of the Fed supervision. If we are not improving them, and 

the SIFIs are, year after year, still found to have systemic risk, 

what will the labeling of these companies as SIFIs have achieved? 

As previously stated, I think the Council should provide some degree of guidance as to the SIFIs as to how they could mitigate their 

systemic risk, and I will continue my efforts to encourage the 

Council to provide such guidance. 

Thank you, Mr. Chairman. I am happy to answer your questions. 

[The prepared statement of Mr. Woodall can be found on page 56 

of the appendix.] 

Chairman LUETKEMEYER. Thank you, Mr. Woodall. This panel is 

going to get a blue ribbon with a gold star, because every single 

one of you stayed within your 5 minutes. That is a first for me in 

my 7 years of being here. Well done, gentlemen. 

Let me begin the questioning this afternoon with Mr. Sullivan. 

Dodd-Frank requires the Fed to develop a domestic capital standard that you discussed a minute ago. Where are you in that process? And when do you expect we can receive the final capital standard? 

Mr. SULLIVAN. Thank you, Mr. Chairman. We are not being driven by an artificial timeline to develop that standard. Right now, in 

terms of our progress, we continue to solicit views from external 

parties, some degree of internal deliberation, as we prepare to 

present to the Board an array of options that could be considered 

for a domestic capital standard. So we don’t have a specific timeframe; we continue to work at it. And as I said in my testimony, 

we had a very open door in terms of soliciting the views from 

many, including our friends in the State regulatory communities 

and others. 

Chairman LUETKEMEYER. So it could be anywhere from 2 months 

to 2 years, is that what you just said? 

Mr. SULLIVAN. I don’t think this is something you want to hurry 

or rush along. I think this is something about which we want to 

be very careful and thoughtful and deliberate. 

Chairman LUETKEMEYER. I think that begs the question, then, 

what we would like to see is a domestic standard set first before 

we go to the international standard. Would you commit to doing 

that as well? 

Mr. SULLIVAN. Well, ours is an obligation under the law to fulfill 

our obligations under Dodd-Frank. The standard setting at the 

IAIS I would differentiate insofar as Director McRaith— 

Chairman LUETKEMEYER. Are we are not putting the cart before 

the horse? Are we not going to sort of endanger your ability to do 

your job if the international group decides to set capital standards, 

and suddenly you have to take that into consideration with your 

standards. Is that not going to happen? Isn’t that a possibility? 

Mr. SULLIVAN. We are not obligated to enact anything— 

11 

Chairman LUETKEMEYER. I didn’t say you are obligated. I asked 

if that is a possibility? 

Mr. SULLIVAN. I suppose, from a timing perspective, it could play 

out that way. 

Chairman LUETKEMEYER. Therefore, my question is, Mr. Sullivan, are you willing to put in place the domestic standards, before 

you allow the international standards, or agree to putting international standards in place? 

Mr. SULLIVAN. Our development of the domestic standards will 

be done on our timeframe after a thorough and deliberative process 

through the Board. And anything that we consider internationally 

will have to meet the test of, is it appropriate for the U.S. market? 

Is it appropriate for U.S. consumers? 

Chairman LUETKEMEYER. Well, it is hard to understand how it 

could be appropriate, sir, if you haven’t gotten them in place yet, 

whenever you try to make a determination on an international 

basis. 

Mr. McRaith, would you agree with that statement? 

Mr. MCRAITH. Forgive me, I didn’t get every word of your comment. 

Chairman LUETKEMEYER. Okay. Mr. Sullivan thinks that we 

need to take into consideration—well, I don’t want to put words 

into Mr. Sullivan’s mouth, so let him rephrase his comment. 

Mr. SULLIVAN. My statement was that we would develop our domestic capital standard on a timeframe that we deem appropriate, 

and that we would consider any international standards for adoption, but they would only be adopted in the United States if they 

were appropriate for U.S. markets. 

Chairman LUETKEMEYER. If they were appropriate for U.S. markets, that is the concern I have. Mr. McRaith? 

Mr. MCRAITH. I support Tom Sullivan’s comments. I think we 

have two separate issues that are at play, one is the global standard. What we are doing collaboratively is ensuring the U.S. leadership in that conversation is provided domestically, which has the 

force of law and a requirement the Federal Reserve should proceed 

in a way that is deliberative and tailored to the companies under 

their supervision. 

Chairman LUETKEMEYER. Further, I want to congratulate and 

thank Mr. McRaith and Mr. Sullivan for being open and available 

to myself and this committee. I know that part of our job here is 

not just legislative, it is also oversight, and to work with Mr. Sullivan and the Fed and Mr. McRaith, the FIO, to sort of peek over 

their shoulders and watch what they are doing, especially with this 

international discussion going on. They have been very cooperative 

and very forthcoming, and I want to thank you for that. 

Mr. Woodall and Mr. Huff, you guys are working with the SIFIs 

and have long comments in your opening statements about it. You 

know, Mr. Woodall, you talked about the material financial stress 

and not using activities to mean, because they don’t do that, they 

can’t figure how the how to de-risk. This is extremely important. 

This is a really big problem, because how can you tell somebody is 

doing something wrong, but you don’t tell them how to fix the problem. Would you elaborate just a little more? 

12 

Mr. WOODALL. That restates it beautifully, because if the companies don’t know what they need to do to not be a SIFI, then they 

are in the dark, the regulators are in the dark, then we haven’t 

really accomplished anything. 

Chairman LUETKEMEYER. It is kind of like if you have a teenage 

driver, and they keep running in the ditch, you don’t tell them you 

have to turn to the left once in a while instead of keep turning to 

the right to get into the ditch, they will never get out of the ditch, 

will they? 

Mr. WOODALL. Exactly. 

Chairman LUETKEMEYER. I am out of time. So Mr. Huff, hopefully you will be able to answer my question regarding that shortly. 

Let me recognize the gentleman from Missouri, my good friend 

and colleague, and ranking member, Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. I want to continue 

along the lines the chairman established. Let me first recognize— 

I didn’t see him earlier—Senator Ben Nelson from Nebraska. I appreciate you being with us here today. 

Mr. Sullivan, I think I understood every word you said. I am just 

a little concerned about it, and I am wondering whether or not this 

won’t end up being a major mistake. It would seem to me that, you 

know, I want to set the rules in my house first before I started 

passing city ordinances, regulating what you can do—I mean, the 

curfew is set in my house, because if we end up being, somehow, 

ending up placing our standards based on international standards, 

it may put some kinds of undue pressure and influence on our insurance companies. 

And I know, I heard what you said, I just think it is difficult to 

take into account what is happening internationally if we are going 

to put this framework together first. 

I may be asking the same question in a different fashion. Are you 

concerned about it at all? 

Mr. SULLIVAN. We are obviously concerned, but we are—we have 

a seat at the table, as Director McRaith pointed out in his testimony, the U.S. insurance market is the world’s largest insurance 

market. I fail to see how an insurance standard would be widely 

accepted around the globe if you ignore the world’s largest insurance market. 

So collectively, with representatives from the NAIC, and Director 

McRaith, and the Fed, we are at the table at the IAIS working to 

fashion and craft an international standard that we believe will be 

appropriate for U.S. insurance markets and U.S. insurance consumers. That work has, thankfully, because of the good efforts of 

Director McRaith and Director Huff and others, been extended. 

Some of the timelines have been pushed out, as the chairman noted 

in his opening statement. 

So I think we have some room. I don’t underestimate the gravity 

of what you have pointed out, Mr. Cleaver, but I think if we continue to work together and represent the United States at the 

international fora, we will hopefully get to something that will be 

acceptable. 

Mr. CLEAVER. I am assuming that all four of the witnesses agree 

with some variance of that? 

13 

Mr. MCRAITH. Congressman, one point that I think is important 

to make is the alternative of not participating in the global discussions would be far more detrimental to U.S. interests than us being 

involved as we are right now, working together to assert and provide U.S. leadership in those fora. That is exactly what we are 

doing. When the Federal Reserve develops its rule, it will be tailored appropriately following, as Mr. Sullivan said, a lot of good 

work. That allows us to further lead the conversation. Right now, 

we want to be sure in these early days of development that we are 

very clear and assertive about the U.S. views on these important 

topics. 

Mr. CLEAVER. Okay. I would like to have more conversation on 

this, but I want to go to Director Huff. The Missouri insurance industry is, right now, about a $34 billion industry, with over $112 

billion in State-chartered financial institutions. What condition 

would you say the State’s insurance agency is in? I know somebody 

probably thinks it is a softball thrown up in the air, please view 

it as such. 

Mr. HUFF. Thank you, Congressman. The Missouri market is 

very competitive at this point in time in most lines of business. 

Workers’ comp, in particular, we have over 320 active writers in 

the State and insurers are actively competing for employees to offer 

workers’ compensation. 

Our auto market has just been rated by an outside source as the 

seventh most competitive in the United States. In the auto industry, again, we have about 175 active writers, so those markets are 

very competitive. 

The health side, not so much. We are struggling on our health 

insurance side of having active writers in the market, and really 

4 health insurers control almost 90 percent of the market. That is 

an area we struggle in. 

The other area that we have quite a bit of expertise in is the reinsurance market. We are home to two of the largest reinsurers in 

the world. And at this point, due to the redomestication of a reinsurer, about 40 percent of all the life reinsurance in the United 

States is written out of a Missouri domestic. 

Mr. CLEAVER. Thank you. I yield back, Mr. Chairman. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

With that, we go to the gentleman from Florida, Mr. Posey, for 5 

minutes. 

Mr. POSEY. Thank you very much, Mr. Chairman. And I thank 

all of you for being here today. I really appreciate you taking the 

time to testify before us today. 

My question is for Mr. Huff. In your written testimony—it wasn’t 

in your oral testimony; I understand that time constraints wouldn’t 

allow you to expand too much—you noted that the National Association of Insurance Commissioners, which consists of chief insurance regulators from the States, which we know are political bodies 

that actually balance their budgets, and regulate in a way that we 

could hope the Federal Government might achieve some day—they 

do a lot better job of regulating actually—is supportive of House 

Resolution 1478, the Policyholders Protection Act. 

14 

Mr. Chairman, at this time I would also like to submit an additional stack of letters of support for the Policyholders Protection 

Act that has been received by my office. 

Chairman LUETKEMEYER. Without objection, it is so ordered. 

Mr. POSEY. I would also like to echo Mr. Huff’s testimony that 

this bill enjoys wide support from the States, the consumers and 

the insurance industry and the people that it protects. This legislation is a bipartisan effort introduced with Representative Sherman. 

It would limit the ability of Federal bank regulators to raid certain 

solvency threatening insurer assets as a source of strength for 

banks. 

My question, Mr. Huff, for you is that, I hope you could explain 

to us in a more detailed manner how this legislation is important 

to protecting insurance consumers and why policyholders need this 

protection? 

Mr. HUFF. Thank you, Congressman. State insurance regulators 

strongly support your bill, the Policyholder Protection Act, mainly 

because it preserves our ability to protect consumers within complex financial firms so that policyholder dollars necessary to pay 

claims, for instance for a damaged house, or even for a life claim 

for a deceased breadwinner, those claims are not jeopardized by 

complex bets, risk taking or poor management elsewhere within 

the firm. The bill ensures the State insurance regulators continue 

to have the ability to specifically protect insurance-related assets in 

order to pay claims when they come due, and the policyholders remain protected from undue harm. 

Insurance regulators have long had the ability to wall off insurance company operating entities within large diverse financial 

groups from the risk posed by other affiliates to protect policyholders. And your legislation guarantees a level playing field and 

confirms that authorities, and existing State law, and Federal law 

governing bank holding companies, apply to insurers organized as 

savings and loan holding companies. It also clarifies insurance regulators’ authority to protect policyholders during a resolution of an 

insurance company or its affiliate. Thank you for sponsoring the 

bill. 

Mr. POSEY. I thank you for your comments. A question for any 

of the four of you, have any of you heard of TRG, an insurance 

company? They sold health insurance in 49 States, every State but 

their own State. People died because they didn’t pay claims. They 

paid their premiums, but the insurance company just never paid 

any claims. They were protected from the States for years under 

ERISA; the Federal Government did nothing, nothing, zero, nada, 

zilch, to stop the perpetrators of this horrendous crime against honest, law-abiding citizens who were just trying to insure loved ones 

for future misfortune, health misfortune, which they had. 

There never was any justice until 13 different State agencies got 

together for the first time in history, crossed State lines to enforce 

crimes, insurance crimes and—pretty precedent setting matter, the 

point is that the State regulators made it happen, the Federal regulators did nothing. 

And so, I learned a lot from that experience. And I cannot thank 

the State regulators enough for their dedication, and actually their 

ability to get things done, and protect the consumers in ways that 

15 

the Federal Government has never been able to do. They write 

plenty of regulations, but there are Federal statutes that would 

have made those perpetrators serve life in prison because people 

died for them failing to pay for the coverage, yet they never pursued the cases again them. Thank you very much, Mr. Chairman. 

I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. We 

go to the gentlelady from New York, Ms. Velazquez. She is recognized for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Director McRaith, one area of the market which is particularly 

important to my constituents is affordable flood insurance. As you 

know, many homeowners in New York City faced enormous rate 

hikes in the aftermath of Superstorm Sandy. What role does the 

FIO play in studying the flood insurance market and what suggestions do you have to keep it affordable? 

Mr. MCRAITH. Treasury certainly has an interest in the flood 

program. As you know, the Treasury lends money to the National 

Flood Insurance Program (NFIP). The NFIP is administered by 

FEMA within DHS, and we—and they, of course, do their best in 

that work every day. To the extent that they have asked for or 

sought our assistance or our perspective, we have been happy to 

share that. 

Ms. VELAZQUEZ. Thank you. Mr. Sullivan, the State risk-based 

capital regime is focused on policyholder protection. Yet, the Federal Reserve supervisory system takes a far more macro approach 

to protect the safety and soundness of the entire financial system. 

How can the Federal Reserve establish a supervisory framework 

for insurance companies to both protect policyholders and preserve 

financial stability? 

Mr. SULLIVAN. Thank you, Representative. Ours is a macro role, 

and we do look at our role as that of looking at the entirety of the 

enterprise. As I said in my opening statement, we don’t intend to 

replicate the work of the States, and we will defer. We are absolutely deferential to the States in their mission to protect policyholders. I was once a State regulator; I take that very seriously. 

And I think the State regulators are doing a fine job of protecting 

policyholders. 

Ms. VELAZQUEZ. Thank you. Mr. Huff, would you like to comment? 

Mr. HUFF. Yes, we have a good working relationship with the 

Fed. You may know Missouri is the only State with two Federal 

Reserve banks. And, so, we have a Kansas City Fed and the St. 

Louis Fed and we also have a good working relationship with the 

Fed here in Washington. But we do take protection of policyholders; that is our number 1 priority, and, of course, building competitive and maintaining competitive markets. But everything we 

do in terms of financial regulation starts and stops with protecting 

policyholders, whether it is looking at the—strengthening our RBC 

system, and as we work on capital standards, or if it is our work 

related to reinsurance collateral and our work on covered agreements. So we do start and stop with policyholders. 

Ms. VELAZQUEZ. Thank you. Mr. Huff, in 2013, then-New York’s 

Superintendant of Financial Services found life insurers were exVerDate Nov 24 2008 14:43 Sep 15, 2016 Jkt 099751 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\99751.TXT TERI
16 

ploiting the State-based regulatory scheme to inflate their books to 

the tune of $48 billion. This revelation has troubling similarities to 

the issues surrounding mortgage-backed securities that precipitated the 2008 financial crisis. Don’t these practices threaten the 

legitimacy of the State-based insurance regulatory structure and, 

in turn, fuel calls for more Federal involvement? 

Mr. HUFF. Just to clarify, were you talking about the New York 

study on captives? 

Ms. VELAZQUEZ. The New York Superintendent of Financial 

Services found life insurers were exploiting the State-based regulatory scheme to inflate their books; a New York Times article. 

Mr. HUFF. Right, I think you are talking about the New York 

Times article now about the use of captives. And we have made a 

great deal of progress. As I said in my opening comments, really 

the origin of captives was, in large measure, to address admittedly 

excessive reserves. Primarily when we took a look at it, in term insurance and universal life insurance with secondary guarantees. 

So what we did was we began with a study of life insurers in 

2012, we finished a White Paper that outlined these issues in 2013. 

And then in 2014, the NAIC adopted a comprehensive reinsurance 

framework such that a life insurer would be allowed to take financial credit for the reinsurance transaction with its captive only if 

certain financial criteria are met. 

And a very consistent reserving method was developed and 

adopted by the NAIC, you may have heard of it, Actuarial Guideline 48, and it was effective on 1/1/15 on all new policies issued. 

So we have taken very certain action on these life insurer captives. 

Of course, our permanent solution to address this is our principlebased reserving methodologies. 

Ms. VELAZQUEZ. So you are confident that these issues have been 

taken care of? 

Mr. HUFF. I am confident we are on a path to take care of them, 

yes, ma’am. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman LUETKEMEYER. I thank the gentlelady. Her time has 

expired. With that, we go to the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Mr. Sullivan, Chair Yellen, in testimony before the House Financial Services Committee this year, stated that the FSOC has not 

discussed pursuing an activities-based systemic risk review for insurance companies. What is the rationale for not pursuing an activities-based systemic risk review for insurers? 

Mr. SULLIVAN. I think you should direct your question to the 

Chair. She is the seated member of the FSOC. I believe— 

Mr. ROTHFUS. Has the FSOC conducted a study or an analysis 

that demonstrates that it is inappropriate to use an activitiesbased approach to regulating systemic risk for insurers? 

Mr. SULLIVAN. May I have the question again? I’m sorry. 

Mr. ROTHFUS. Has the FSOC conducted a study, or an analysis, 

that demonstrates that it would be inappropriate to use an activities-based approach to regulate a systemic risk review for insurers? 

Mr. SULLIVAN. I am not aware of what the FSOC has or has not 

conducted for studies. 

17 

Mr. ROTHFUS. Mr. Woodall, in your written testimony you discuss the benefits of incorporating an activities-based systemic risk 

approach and the exit ramp that should follow based on activities 

or a combination of activities identified as riskier than others. 

Both the Treasury and the Fed have testified that a path to dedesignation is available, but have been hesitant to provide details. 

Do you believe that a SIFI designation exit ramp exists? 

Mr. WOODALL. As I said in my statement, I think that it should 

exist, but I think right now the companies don’t really know where 

that exit ramp is, and whether it is multi-lane or not, as it has 

been called. It is hard to find. I think going back to your other 

question about the activities based, I think on the other side of the 

question you ask, FSOC has looked at the activities thing in regard 

to asset managers, and they have essentially set aside making any 

further designations on any basis until they can look at the activities of the asset management industry as a whole, and that is what 

they are in the process of doing right now. So I am encouraged that 

they are starting to look at the activities based. 

Mr. ROTHFUS. Mr. McRaith, in January Congress passed The National Association of Agents and Brokers Reform Act of 2015, better 

known as NARAB II. This bipartisan legislation was meant to 

streamline licensing compliance measures for insurance agents 

while maintaining a high standard of State-based regulation. 

As you know, NARAB II won’t go into effect until a board is selected and appointed. Though the President signed this bill 9 

months ago, it appears that little progress has been made in appointing a board, and the process of reform that Congress worked 

hard on appears to be at a standstill. 

Our chairman, Mr. Luetkemeyer, wrote to your agency expressing his concerns and inquiring as to NARAB II’s delayed implementation. I was disappointed that Treasury’s response to his letter 

was noncommittal and failed to provide a meaningful update on 

the implementation process. Can you provide us with an update on 

the NARAB II board appointments? 

Mr. MCRAITH. Congressman, as you know, the law requires 13 

Presidentially-appointed Senate-confirmed board members. We received applications—the White House has received applications. 

Candidates are being considered, evaluated, vetted, and I am sure 

at an appropriate time the White House will forward those— 

Mr. ROTHFUS. Has the Treasury Department completed its work 

on the vetting process? 

Mr. MCRAITH. We have done what we can to support the effort. 

I think the Administration, which supports NARAB as an objective, 

continues to see the value and wants to see NARAB initiated as 

soon as possible. 

Mr. ROTHFUS. Back to Mr. Woodall again. You have complained 

that your role in international negotiations as the only voting member of FSOC with insurance expertise has been constrained. Why 

do you think that is? 

Mr. WOODALL. Essentially, what they call Team USA or the gentlemen to my right here, the three people who are involved at the 

IAIS. I have a duty as a member of FSOC to monitor international 

developments in insurance and accounting. That is the way it 

18 

works. Obviously, Mr. McRaith has the charge, as he said, to represent the United States at the IAIS, as appropriate. 

I felt that being the insurance expert on FSOC, I needed to be 

involved in the room where the systemic issues are being discussed, 

and that is what we talked about 2 years ago when I was before 

this subcommittee. At that time, several people said they wanted 

me in the room. I tried to make an effort to get in the room. 

Mr. ROTHFUS. Do you believe that the FSOC approaches international negotiations on insurance matters with a sufficient understanding of the industry? 

Mr. WOODALL. I am supposed to be the expert to try to advise 

FSOC. And right now, I can’t say that FSOC has that comprehensive a view of what is happening at the international level. I think 

there is a feeling that the international may be driving that car, 

as far as what is being done at the international level coming down 

into the other. Because, as you know, when our people are at the 

FSB, and they make commitments to carry out something that the 

IAIS has done, as has been said many times, they can’t guarantee 

it, but they consent, it is a consensual process. 

That is what happened with the three companies, the insurance 

companies that were designated as global SIFIs. And two of those 

were before we ever even said they were a U.S. SIFI. And I really 

feel like we have a situation where the international people have 

been driving that car. 

Mr. ROTHFUS. I yield back. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

We now go to another gentleman from Missouri, Mr. Clay, for 5 

minutes. 

Mr. CLAY. Thank you, Mr. Chairman. And thank you, gentlemen, 

for being here. 

Let me start with Mr. Sullivan. In its development of capital 

standards, is the Federal Reserve attempting to draw a distinction 

between traditional or core insurance activities versus nontraditional or non-core activities? 

Mr. SULLIVAN. So as we construct a domestic capital regime, we 

will be looking at the totality of the enterprise, including insurance 

activities and nontraditional, or non insurance activities, because 

we are charged, under the law, with developing a comprehensive 

consolidated capital framework. So we will be looking at the totality of the enterprises we supervise. 

Mr. CLAY. Stress tests serve as an effective tool for measuring 

the health of financial institutions. Will the Federal Reserve engage in stress testing for insurance companies? 

Mr. SULLIVAN. Yes, likely at a minimum for the designated firms, 

and in consultation as prescribed under Dodd-Frank with the Federal Insurance Office. 

Mr. CLAY. Will these tests specifically look at systemic circumstances and stresses to the broader financial system that could 

occur simultaneously with stresses to the supervised firm? 

Mr. SULLIVAN. It is too early to speculate on that, but probably. 

Mr. CLAY. What do you think are the differences between testing 

stresses at an insurance company versus a bank? 

19 

Mr. SULLIVAN. The business models are very different. And, so, 

therefore, whatever stress testing regime we design needs to be appropriate and designed for the differences in the business models. 

Mr. CLAY. Thank you for your response. 

Mr. Huff, as the International Association of Insurance Supervisors continues to work on the development of capital standards, 

some have raised concerns about its application in the United 

States. 

Mr. Huff, as a State insurance commissioner, can you discuss the 

steps that your department, for example, would take in reviewing 

any internationally-developed standards and discuss what actions 

would need to be taken for those standards to apply in Missouri? 

Mr. HUFF. Thank you, Congressman Clay. It is important to remember that nothing that the IAIS does in terms of international 

capital standards, or any of the work they do for that matter, is 

automatically implementable in the United States for insurance 

firms. Unless the NAIC, with State regulators working collectively 

through the National Association of Insurance Commissioners, 

adopts those standards through its open and transparent process, 

then it would not be applicable to the insurance market, or unless 

the Federal Reserve decides to adopt those standards for their limited portfolio of the thrift holding company insurers, or the systemically importantly financial institutions as designated by FSOC. So 

nothing would come directly from the IAIS. 

Mr. CLAY. I see. Mr. Woodall, you have expressed concerns with 

international developments related to insurance, but as you know 

very well, while the Federal Government can certainly agree to reforms at the international level, domestic implementation would 

largely occur State by State. Even for implementation that would 

occur at the Federal Reserve Board, there would still be a noticeand-comment period prior to implementation. 

Can you please discuss in more detail the process that any State 

insurance commissioner would go through when deciding whether 

or not to implement international reforms, in full or in part? 

Mr. WOODALL. I am not a regulator at this point. Fifty years ago, 

I was. But I know how it works and I know that each State has 

to look at it to see whether or not that is what they want to do. 

I think more than likely, some of these things won’t affect that 

many States because there won’t be that many States that have 

companies that might be subject to some of these things. 

Now, whether that would go down to non-internationally-active 

companies, it is still a question as to how far some of the recommendations that come out of the international level will go. 

Mr. CLAY. Thank you for your response. 

Mr. Chairman, I yield back the balance of my time. 

Chairman LUETKEMEYER. I thank the gentleman from Missouri. 

With that, Mr. Pearce from New Mexico is the next gentleman to 

be recognized, for 5 minutes. 

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

being here. I am trying to sort through this situation that we have 

faced. 

Mr. Sullivan, you mentioned to Mr. Rothfus that he needed to direct his question elsewhere, and we in anticipation of that did just 

that. We asked the Chair of the Board of Governors of the Federal 

20 

Reserve System, Janet Yellen, after her last appearance here about 

a couple of things regarding this particular issue. And we asked, 

does the FIO communicate and coordinate, pre-plan policy objectives with independent State regulators, insurance regulators who 

are responsible for insurance supervision in the United States. 

Her response back was Team USA—that, yes, we approach it as 

a team, and NAIC takes the lead in coordinating the views and 

comments of State regulators into the the feedback the U.S. members provide on IAIS standards. 

So my question to you is, is it safe to assume that the Fed does 

not propose any ideas before the IAIS or FSB without NAIC’s approval or previous knowledge of those positions? So is it actually 

Team USA, and I am visualizing the Tour de France, the postal 

team on bicycles are riding and high-fiving each other, but the yellow jersey is worn by the NAIC. Is that the way it is going? 

Mr. SULLIVAN. We continue to work hard at our collaborative efforts— 

Mr. PEARCE. You are far enough behind the yellow jersey that 

you can hardly see them over the hill, huh? 

Mr. SULLIVAN. I would tell you that it takes hard work and good 

old-fashioned shoe leather to be committed to the process. 

Mr. PEARCE. Mr. McRaith, do you have an opinion about the 

communication process and the NAIC taking a lead? 

Mr. MCRAITH. The key for our work is that we are working together building consensus as a group. 

Mr. PEARCE. I didn’t ask that. Do you agree with the assessment 

that nothing goes before it is run by the NAIC? 

Mr. MCRAITH. As a practical matter, and as the GAO noted in 

its report about 7 weeks ago, we are all working together to develop— 

Mr. PEARCE. You are just not going to answer the question. I will 

quit asking the questions if you don’t want to answer. 

Mr. Woodall, Mr. Rothfus brought up, he was kind of dragging 

into this direction with the crafting of international standards. I 

think Mr. McRaith said that we are trying to craft international 

standards that will be acceptable to the U.S. market. Mr. Rothfus 

sort of got into this. Is it your opinion that we were actually doing 

that, is—are we crafting standards that will be acceptable to the 

U.S. market, I mean, he led in with it is a big piece of world equation and that. Is that actually occurring? 

Mr. WOODALL. It is really hard for me to say, because as I mentioned, I am not a member of Team USA. 

Mr. PEARCE. Have you ever objected—have you ever dissented on 

any of these comments before? 

Mr. WOODALL. Which comments, sir? 

Mr. PEARCE. Anything along this track that says, hey, we are 

running a nice, tight ship here, and we are Team USA and we are 

moving right along. That is nothing that you have ever— 

Mr. WOODALL. Well, no, I have just tried to get in the room with 

them and have not been successful. 

Mr. PEARCE. Okay. Mr. Huff, you said that the protection of the 

policyholders is your number one priority. Is that the viewpoint 

shared by the Feds and FIO? 

21 

Mr. HUFF. I will let the Fed and FIO speak for themselves, but 

our number one mandate continues to be the protection— 

Mr. PEARCE. But you heard my comment from the chairman that 

you are the one taking the lead here. You are wearing the yellow 

jersey, everybody is following you. Is that actually occurring or is 

that not? 

Mr. HUFF. We certainly are— 

Mr. PEARCE. I don’t know if are you afraid of what is going to 

happen after you answer the question. 

Mr. HUFF. I will tell you one place we are taking the lead—if I 

could give you an example of where we are taking the lead, we are 

moving forward with the group capital calculation, State insurance 

regulators are getting together and moving forward. We will have 

a concept paper later this year for our November meeting that will 

be at the National Harbor in November. 

Mr. PEARCE. You also made the comment that no case has been 

made, and you don’t want the system to compromise the State systems. Is that a viewpoint you would share, Mr. McRaith? You are 

trying not to compromise the State systems that Mr. Huff said 

have been working pretty well. And no case has been made to overturn them for international standards? 

Mr. MCRAITH. Absolutely, the global standard setting does not 

get into the structures or the architecture of a country’s regulatory 

system. In our view, the State system works very well. I was a 

former State regulator, as were my colleagues on this panel. 

Mr. PEARCE. This is true confessions. Several of you were apparently in the State regulatory system. Okay, thanks. I yield back, 

Mr. Chairman. 

Chairman LUETKEMEYER. The gentleman’s time has expired. We 

now go to the gentleman from Texas, Mr. Green, for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the ranking 

member as well. And I thank the witnesses for appearing. 

Mr. Woodall, you have raised questions about SIFIs and how 

they can be delisted. Is your question how can a specific entity, 

company, corporation be delisted, or is there a means by which you 

can have a standardized methodology in place for delisting? 

Mr. WOODALL. So far, we have just talked about the individual 

SIFIs. And I think in that case what I was saying is that these individual companies don’t have a road map as to how to get off. Now 

there is one; we talked about the insurance companies, the GE 

Capital is the fourth SIFI that was designated. And as you probably know, it is public information, they are in the process of getting rid of all their financial activities, and probably will lose their 

SIFI identity. But I am not sure that insurance companies are in 

the position to do the nuclear option and get rid of all their financial business in order not to be a SIFI. 

As far as a group— 

Mr. GREEN. Let me do this, because I would like for Mr. Sullivan 

to respond, I am interested in hearing his take on it. Mr. Sullivan, 

Mr. Woodall makes a point that because of the nature of the business of insurance companies, delisting becomes a bit more difficult 

than for a GE Capital. How do you respond to that? 

Mr. SULLIVAN. Representative, mine is to design the regulatory 

regime and architecture for firms after they are designated by the 

22 

FSOC. So what I am doing in my day job is doing just that, making 

sure that we put together a regulatory regime designed for firms 

designated by the FSOC. 

Mr. GREEN. So no one on this panel can address Mr. Woodall’s 

question then, I take it? 

Mr. MCRAITH. Actually, Congressman, just to be—I think it is 

important to be factual in this conversation. The firms that are 

designated by the Council, after following months of engagement 

with the firm, thousands of pages of analysis, hours spent with the 

firm by all Council members, the firm designated receives several 

hundred pages of analysis that provides detailed and explicit statements about where the Council sees risk or threats to financial stability in the firm. So the firm does have a very clear sense of the 

basis for the Council’s determination. 

Mr. GREEN. I understand. But Mr. Woodall seems to be asking 

another question, not what is it that caused the company to become 

a SIFI. He seems to be asking what can be done so that the company can no longer be a SIFI? 

Mr. WOODALL. That is the difference, that is the next point. 

Mr. GREEN. Mr. Woodall, you have to let me have a minute here 

now. My time is very limited. 

So how do you address his question? I think he raises a good 

question, and I would like to hear a good answer. 

Mr. MCRAITH. The Council has an annual review process for 

firms that have been designated. That process was enhanced this 

year based on stakeholder and public comment and comments from 

Members of Congress as well. So each firm designated has an opportunity to come to the Council, provide information about how it 

has changed its approach over the course of the year. And throughout the year, the Council and its staff and members who serve on 

the Council have an open-door policy whereby a firm designated 

can come in at any time, share any information and provide any 

insight they would like to. 

Mr. GREEN. I see. Let me just make this comment. It seems to 

me that we are talking about something similar to strict liability. 

As you know, we have negligence and intentional torts, but you can 

also be liable just because of the inherent nature of what you do. 

And I think Mr. Woodall is getting to this point, he doesn’t believe that insurance companies are inherently dangerous to the extent that they become SIFIs and they are never going to cease to 

be SIFIs. 

So the question becomes—and I am going to visit more with people about this, I am just curious now because of the way he raised 

the question. How do they—we are new at this, we are in our infancy. All of this is fledgling in a sense, and given that we are in 

our nascency, these kinds of questions do have to be answered. And 

perhaps with more opportunities, we will get some answers, but I 

am still curious of Mr. Woodall’s question of moving from designation to no longer being listed or de-risking is a case with GE Capital. Thank you very much. And Mr. Chairman, you have allowed 

me 11 more seconds than I deserve. I yield back. 

Chairman LUETKEMEYER. I am always glad to accommodate the 

gentleman from Texas with a couple of extra moments for his wonVerDate Nov 24 2008 14:43 Sep 15, 2016 Jkt 099751 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\99751.TXT TERI
23 

derful insights. Thank you, Mr. Green from Texas. With that, the 

gentleman from Kentucky, Mr. Barr, is recognized for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. And I thank the witnesses, 

as well. There has been much discussion outside this hearing, and, 

of course, today in this hearing about the sequencing and the timing of the international capital standards and our new domestic 

capital standards under the fix to the Collins Amendment. 

For Mr. Sullivan, I would like to kind of drill down a little bit 

more on the timing. I know you said we are working on our own 

timeline. Do we have any kind of ballpark timeframe in terms of 

the draft of capital standards? And give me an idea of the process. 

Is there going to be a notice of proposed rulemaking? 

Mr. SULLIVAN. Yes, we are committed. We said to this committee 

and other Members that we are committed to a formal rulemaking 

process. We will not be doing it by order, so we will publish a notice for proposed rule. We will solicit interested party commentary 

when we reach the point where we actually have the architecture 

and design for the capital framework better nailed down. 

Mr. BARR. Mr. McRaith and Mr. Sullivan, how much does your 

work at the FSB and IAIS influence the development? You say you 

are very deliberative, and you are seeking input, but how much 

does that work over there influence the development of the capital 

standards here? 

Mr. SULLIVAN. I will go first, but I would say that when we attend international fora, Representative, other regulators around 

the globe are quite interested in what the U.S. view is. As Director 

McRaith pointed out, we are the world’s largest insurance market, 

so I think the rest of the global regulatory community would stand 

up and recognize what the United States does. So I think it does 

go back to the chairman’s earlier questions around the importance 

of getting things right. And we are cognizant of that, and we want 

to make sure we are deliberate and we do nail it down. 

Mr. BARR. Can you give me an idea of the progress of the international capital standards, because we are hearing that whereas 

you are on your timetable here and it is very deliberative, that the 

IAIS is pushing ahead. So is the risk then that the sequencing is 

going to be backwards? 

Mr. SULLIVAN. We always have the fallback that we don’t have 

to adopt an international standard if it is not suitable for our market, right? We have said that a number of times today and in the 

past. With that being said, sequencing here, one is a fulfillment 

under the law, what we do in terms of fulfilling our obligations 

under the law. The other is standard setting. I would describe the 

standard-setting climate as much more evolutionary because it has 

to be. 

Director McRaith has used the term when talking about the 

international capital standard, ICS 1.0, and how ICS 1.0 will look 

much different or may look much different than ICS 10.0. I would 

share that view, that the developments in the international standard need to evolve more over time, over a much longer time period. 

And we were successful in removing some of the time constraints 

that were in some of the goal statements that were previously published by the IAIS. 

24 

Mr. BARR. I would just encourage you all as representatives of 

Team USA to be prepared to back off, and push back from the IAIS 

negotiating table if you perceive them getting ahead of you all. 

Let me just shift over to Mr. Huff really quickly. One of your colleagues who was before this committee, Kevin McCarty, the Florida 

insurance commissioner, said in a Senate Banking Committee 

hearing earlier this year that in regards to international capital 

standards being developed, and the historical differences between 

the United States and European approaches, when you try to harmonize those two, you are creating a potential for great disruption 

in the delivery of different services in the marketplace and potential rise in the price for the consumers in the United States that 

potentially jeopardizes the availability of products. 

And so, to Mr. Huff, how are State regulators and the NAIC 

working with the Fed to make sure that domestic capital standards 

are finalized before completion of the international capital standards? 

Mr. HUFF. Yes, thank you for the question. We are actively involved at the IAIS along with the Fed and FIO, and with the State 

insurance regulators and a full complement of NAIC staff. So it is 

important that we continue that work, even when we reach disagreements with the IAIS process, because we always do have that 

ability to walk away. 

But what we are doing—the State regulators are doing is we are 

moving ahead with our own work on a group capital calculation to 

be used as a consistent regulatory analytical tool for all U.S. insurance groups. And by building this calculation tool, we are able to 

assess group capital and then make—and have an open forum 

with—an open and transparent forum with industry and with consumer groups an then allow the Fed and FIO also to participate 

as we build that tool. So that will help us as we inform our work 

at the IAIS. 

Mr. BARR. Thank you. I know Mr. Sullivan testified they are collaborating with you, appreciate you collaborating with them. Team 

USA, go first. Thank you. 

Chairman LUETKEMEYER. I thank the gentleman. Your time has 

expired. Understanding we have votes at 3:45 as scheduled, I think 

we probably have time if everybody stays within 5 minutes here to 

get everybody in today. So with that, I recognize the gentlelady 

from Wisconsin, Ms. Moore, for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. I want to thank 

the panel for this very important hearing. I guess I want to follow 

up on my colleague. Mr. Huff, I note that in your credentials you 

served as a State insurance commissioner from Missouri, as well 

as served on the FSOC. 

Pardon me, I wasn’t here for the beginning of the hearing, so just 

indulge me, perhaps you have already answered this question. You 

have indicated that the FSOC perhaps does not have the knowledge base and a—doesn’t see the dissimilarity between the insurance industry and the banking industry to perhaps serve—to perhaps designate folks as SIFIs or to undesignate them as SIFIs. And 

I am wondering what you think ought to be done to enable the Federal Office of Insurance to, and the FSOC, to have more insight 

25 

into what ought to be done with regard to regulating the insurance 

industry? 

Mr. HUFF. Thank you for the question. I have not yet spoken 

about my FSOC service, and I did serve 4 years. I was one of the 

original members of FSOC as a nonvoting member representing 

State insurance regulators from fall 2010, and then I served until 

September of just last year. And I did issue a dissent, a nonvoting 

dissent on the Prudential designation. And I echo Mr. Woodall’s 

comments on the exit ramp, if you will, for the designation. 

So I do believe it is a failure of FSOC to not set forth a clear 

rationale for the reasons for designation, because really, they are 

not giving the company an ability to de-designate; but more importantly, FSOC is not giving the primarily regulators, and in the insurance space, that is the State regulators, not giving the State 

regulators the identification of those risks that need to be mitigated. 

We don’t yet know what the impact will be of a designation because the capital standards are still pending. But at some point additional capital standards will be applied to those firms that are 

designated, and then we will have a distortion in the marketplace 

of firms competing head to head, one against each other, one with 

a different cost of capital. We don’t know how significant that will 

be, but we think it is only fair that FSOC come out with a clear 

exit ramp, not only for the company, but for State-based regulators. 

Ms. MOORE. Thank you for that. And this is for Mr. Woodall, or 

maybe Mr. McRaith. I am very interested in private mortgage insurers who are recapitalized. I believe that there will continue— 

there ought to be at least a continued option for placing private 

capital in the first loss position. Unfortunately, there has been a 

discussion around here of completely destroying the GSEs, and I 

don’t believe there is enough private capital to fill that gap. So the 

FIO report outlines some of the past problems, issues. But I am 

really interested in what you think the future is going to look like, 

what it ought to look like with regard to private mortgage insurers. 

Mr. MCRAITH. The private mortgage insurers suffered greatly 

through the crisis. They are in a stronger position right now, and, 

in fact, I think some recent entrants into the market are domiciled 

in your home State. 

Ms. MOORE. They are in my city. 

Mr. MCRAITH. Right. And we are pleased to see that. We do want 

to see more private capital in that space. It promotes home ownership in a way that supports people of low and middle incomes when 

they seek to purchase a home. That is excellent public policy and 

a goal that we all share. In terms of the housing market more 

broadly, and the housing finance system, I think would defer to my 

colleagues at Treasury who are more expert in that conversation. 

Ms. MOORE. Okay. Just one quick—I have 30 seconds left. I am 

really interested in the auto insurance—I guess I am interested in, 

Mr. McRaith, why, of your statutory responsibilities, you decided to 

focus on the auto industry first? 

Mr. MCRAITH. We, by statute, are required to monitor the affordability and accessibility of non-health insurance to traditionally underserved communities. 

Ms. MOORE. And just very quickly— 

26 

Mr. MCRAITH. We chose auto because studies show auto insurance and automobile ownership enable lower-income people to commute to jobs that they need. 

Ms. MOORE. Exactly, exactly. We don’t want to cut off those— 

that credit to low-income people, already low-income people are suffering tremendously from the pendulum swing of financial services 

being available to them. Thank you. Thank you, Mr. Chairman, for 

your indulgence. 

Chairman LUETKEMEYER. The gentlelady’s time has expired. 

With that, we go to the gentleman from California, Mr. Royce. He 

is recognized for 5 minutes. 

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

Director Huff, I will just go back to some of your testimony. You 

mentioned that 32 jurisdictions have now passed legislation implementing the NAIC model reinsurance collateral law. But the reality is that 4 years is a long time, and we are still at a point 

where major States like Texas and Illinois are not part of that. 

And so, I was wondering if you say that we need to avoid the 

variation between the States by reducing collateral requirements in 

a consistent manner, it looks to me like, by your own test, we are 

not close to implementing this. And the presumption I would have 

had was that the pressure that would have been applied by the 

threat of a covered agreement might have brought everybody to the 

table. 

The worry I have is that since 1871, we have been trying to get 

the States to adopt a common framework. Give me your thoughts 

on why you think this is going to be done in a timely way, and 

stave off the problems that I anticipate here? 

Mr. HUFF. So on the topic of credit for reinsurance revisions that 

have taken place, the process has been deliberate. It has been very 

methodical; it is very measured and transparent in the way we are 

reducing collateral for foreign reinsurers. We have had 32 States, 

that is about two-thirds of the U.S. market, about 66 percent of the 

U.S. market in terms of premium. We have five other States that 

are seriously considering it and are ramping it up for their legislatures to consider, which will take us over 90 percent, to about 93 

percent of the market. 

Mr. ROYCE. If you can get there. By way of example, if we went 

back through testimony in the past in terms of how many times we 

thought we were a year away from achieving this goal from 1871 

on, in terms of reaching unanimity, it hasn’t happened yet. Now 4 

years may not seem like a long frame by that standard, or certainly 

by congressional standards, to be fair here, but I am highly skeptical that you are going to bring States into line based upon what 

I have seen in past performance here with respect to getting this 

unanimity. 

Mr. HUFF. Well, Congressman, I would point to the fact that we 

have yet to have the decision whether we would make the credit 

for reinsurance provision an accreditation standard. So I will give 

you the example that we just went through from the model holding 

company act, a model that we developed in 2010 to allow insurance 

regulators access to the information from the holding company. 

That model was developed in 2010, is an accreditation standard as 

27 

of 1/1/16, and we plan to have all 50 States, plus D.C., having 

adopted that model. So as we in November start the conversation— 

Mr. ROYCE. I understand. 

Mr. HUFF. —about accreditation for reinsurance. That is a hammer we have, is my point. 

Mr. ROYCE. Okay. Director McRaith, as you know, I am going to 

share this with you today, I sent a letter to the Treasury Secretary 

and the USTR calling for a covered agreement with the EU. Based 

on your diligent work on this issue, I assume you agree such an 

agreement is a positive tool that the United States should use in 

attempting to tackle reinsurance collateral and make progress on 

the question of U.S. regulatory equivalency? 

Mr. MCRAITH. That is exactly right, Congressman. What we 

know is that effective January 1, 2016, the European Union, which 

is the largest consolidated market in the world, will be subjecting 

U.S. insurers to regulatory standards that differ from those applied 

to insurers domiciled in some other jurisdictions. A covered agreement will provide clarity, finality, and certainty for U.S. insurers 

that either are now or seek to operate in the European Union market. 

Mr. ROYCE. Let me jump in on another topic. On January 27th, 

the Homeland Security chairman, Mike McCaul, and I sent an unanswered letter to the President asking how the Administration 

classifies and defines different types of cyber attacks. Specifically, 

we asked whether the use of different terms like cyber warfare, 

cyber vandalism, or cyber terrorism would impact the Treasury 

Secretary’s authority to certify a cyber attack as an act of terrorism 

under TRIA. 

So I assume this is a question you have contemplated as part of 

a larger question. And I think a clear statement from Treasury on 

what is and is not covered under TRIA as it relates to 

cyberterrorism would increase certainty in the market and help encourage individual capacity for cyber insurance. Can you help make 

that happen? 

Mr. MCRAITH. I absolutely appreciate that perspective. The statute does not specify what are the causes or types of terrorist attacks. In 2007, when I testified as a State regulator in support of 

renewal of TRIA, nobody talked about cyber. So the fact it is not 

specifically listed does not mean it is not included. If an event, a 

cyber event or any type of event, satisfies the statutory criteria, 

then it is eligible for TRIA certification. 

Mr. ROYCE. Thank you, Director McRaith. 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

I will now go to the very patient gentleman from Michigan, Mr. 

Kildee. 

Mr. KILDEE. Thank you, Mr. Chairman. And I thank the witnesses for your testimony. I do want to follow up very briefly on 

the question that Ms. Moore raised right at the very end. So if I 

could start with Mr. McRaith, and I appreciate your work and your 

willingness to confer with me in the past on issues important to the 

industry, but I want to follow up. When Ms. Moore asked why FIO 

determined to make auto insurance the focus of your first steps towards implementing the specific responsibility regarding affordability and access, you indicated, I think appropriately, that often 

28 

it is the barrier, perhaps of transportation access to affordable 

transportation that could stand in the way of an individual living 

in an impoverished community from access to economic opportunity. 

I don’t want to put words in your mouth, but implicit in that is 

that there may not be available, affordable insurance to some of 

those populations. I wonder if you would just perhaps elucidate a 

bit more on what would cause you to conclude that—and I don’t 

want to disagree with the conclusion; don’t get me wrong—is a 

problem that needs to be addressed. If you could just touch on that. 

And I would actually, Mr. Huff, perhaps because some of the 

communities within your State, you might make the same observation. 

Mr. MCRAITH. You are absolutely right in the sense that transportation and personal vehicles allow people to have more than one 

job, to deal with children. Often people don’t own a home but do 

have a car because they need it to survive. We know that. 

Now, whether there is an issue with affordability and accessibility is an issue debated within the insurance sector. Some people 

would say no because the residual markets are very sparsely populated. Others would say yes because there is a relatively high percentage of uninsured in urban areas. 

What we are trying to do, Congressman, is establish a standard 

to answer that question exactly and precisely for you. 

Mr. KILDEE. But do you, just based on your experience in Illinois, 

for example—and, Mr. Huff, in Missouri—and I know anecdotes 

are often difficult to extrapolate to a larger trend, but is it safe to 

say that it is certainly the case in older, particularly impoverished 

communities, that the cost of insurance is often beyond the reach 

of many of the individuals because the premiums are much greater 

in those communities than they might be in a neighboring community with fewer challenges? 

Mr. MCRAITH. That is a fair statement, and certainly the State 

of Michigan, we know, has some issues and challenges with the 

personal auto market, and I think your statement, broadly speaking, is true. 

Mr. KILDEE. Mr. Huff? 

Mr. HUFF. So NAIC does have an auto insurance study group, 

and they have already been conducting some of their own analysis 

related to low-income households and the auto insurance marketplace, and we issued a report last year that included some consumer and industry perspectives as well as an overview of State 

programs and initiatives to address these affordability and availability issues. 

I will tell you in my State, we collect data not only for auto, but 

also for homeowners at a ZIP Code level. And that is very important because then you are able to work through any issues, and 

identify if there are any issues in certain ZIP Codes that may require action by the regulator. 

You may have missed my opening comments or comments that 

I made to Congressman Cleaver’s question. Right now, Missouri 

has a very competitive auto market. We have just been named the 

seventh most competitive in the country, so our auto industry, we 

have about 175 carriers actively writing business. And as you 

29 

noted, or Director McRaith noted, our residual market has almost 

no participants. So we are in pretty good shape on the auto side 

in my State, but I am very sensitive to these areas—issues in other 

States as well. 

Mr. KILDEE. Starting with Mr. McRaith, could you address the 

tools that a State insurance commissioner might have available to 

them or statutory approaches at the State level? Assuming that 

there would be some disparity that is not going to be overcome by 

just increased awareness, what tools would a State commissioner 

have available to deal with significant disparity, lack of access to 

insurance, auto insurance in particular? 

Mr. MCRAITH. The regulatory tools vary from State to State. The 

cost drivers vary from State to State. Generally speaking, I think 

Director Huff made an excellent initial point, which is that information is essential. Presently, Missouri collects information, and a 

couple of other States do, but by and large, detailed information 

about personal auto market and costs on a ZIP Code basis is not 

collected. So information is the first tool that a regulator has. And 

then in other States, there are regulatory mechanisms where the 

State regulators can evaluate the rate proposed by the firm and 

then decide whether to approve or disapprove that. But, again, it 

depends on the State. In the State of Illinois, for example, we did 

not have rate approval, and frankly, in many cases and in most 

parts of the State, that worked just fine for us. 

Mr. KILDEE. Thank you. Thank you for your testimony. 

And thank you, Mr. Chairman, for your indulgence. 

Chairman LUETKEMEYER. The gentleman from Michigan’s time 

has expired. 

With that, we recognize the gentleman from Ohio, Mr. Stivers, 

for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. 

Thank you for this very important hearing. My first question is 

for Director McRaith and Mr. Sullivan. So the IAIS is issuing its 

first version of the high loss absorbency rule, which is a capital 

surcharge on nine of the world’s largest insurers, three of which 

are headquartered in the United States, and the IAIS is about to 

at the same time launch consultations to revise two of the important components of HLA: first, the definition of nontraditional insurance; and second, the assessment criteria used to designate systemic insurers. I am curious if you think that we need to maybe 

change those two critical elements of the formula before finalizing 

the capital surcharge, which is largely based on those two components? 

Mr. MCRAITH. You are absolutely correct. The HLA that is developed this year, and I mentioned this earlier, is just the initial 

version, the initial iteration. It is subject to change because many 

of the components are in flux. The document itself when it is publicly released, which will be soon, will explicitly state it is subject 

to change depending upon revisions to NTNI and the G-SII methodology. So your point is exactly right, and the United States. participants at the IAIS strongly supported and endorsed that concept. 

Mr. STIVERS. Great. I would like to move on to Director McRaith. 

Mr. Sullivan, did you have anything to add to that? 

Mr. SULLIVAN. I would associate myself with all those comments. 

30 

Mr. STIVERS. Great. I do want to move on, Director McRaith, to 

something the gentleman from Michigan was just talking about. 

With regard to your study on underserved communities and the affordability of insurance products, especially auto insurance, I am 

curious how you chose to define, and why did you choose that definition of affordable? You can be very brief on that. 

Mr. MCRAITH. We have not settled on a definition of affordable. 

We have now offered two Federal Register proposals and received 

comment. We are working to get to the best approach, recognizing 

that it is not going to satisfy everybody. 

Mr. STIVERS. I appreciate that, and I will tell you I am very concerned about a very big data call like this where there is a lot of 

publicly available data. If you would choose a definition of affordability based on consumer spending, you would get a lot of opportunity to use Bureau of Labor Statistics data. If you would go another direction, you could get a lot of NAIC data. I just feel like 

it is really important for you to use publicly available data first before you have a very large and burdensome data call. Can you comment on your thought process with regard to that? 

Mr. MCRAITH. One of the questions that we ask in both of our 

Federal Register notices is what are the best sources of data and 

information. We completely agree with you. Publicly available data 

is best. We have no desire, no objective, to initiate some data call. 

We want to obtain information that satisfies the statutory mandate, but we do not want to increase the burden on industry participants. We certainly do not want to increase the burden on our 

limited resources. We do have to meet the mandate of the statute, 

and we are going to do that in an effective and efficient way. 

Mr. STIVERS. Thank you. I appreciate that. And I appreciate the 

efficient and effective part of it, and obviously, efficient is part of 

efficient and effective, so please do your best on that. 

The next question I have is for Commissioner Huff. With regard 

to your regulatory jurisdiction, you have a lot of jurisdiction in your 

State over the regulation of annuities, and I am curious if anyone 

at the Department of Labor has talked to you about their new rule 

with regard to fiduciary duty and input they have gotten from you 

or what they have sought from you? 

Mr. HUFF. Yes, thank you. So we do appreciate the Department 

of Labor’s intent to protect consumers as they make important decisions to provide for their retirement security. We were a bit dismayed that we were not contacted before the rule was put out by 

the Department of Labor, but we have since been contacted as 

State insurance regulators through the NAIC. We have engaged 

with the Department of Labor and the Administration since the 

proposed rule was released in the spring. There are obviously some 

issues with the rule on clarity, and there is quite a bit of regulatory 

uncertainty in what is in the rule today, and we have expressed 

those concerns to the Department of Labor. 

Mr. STIVERS. I appreciate that, and I hope they will reach out to 

you, the SEC, FINRA, the Treasury, and the IRS. There are a 

whole bunch of people in this space, and it seems like the Department of Labor has not been very coordinated or information-seeking in their efforts. Thank you. 

I yield back, Mr. Chairman. 

31 

Chairman LUETKEMEYER. The gentleman’s time has expired. 

We go to the gentleman from Minnesota, Mr. Ellison, for 5 minutes. 

Mr. ELLISON. Thank you, Mr. Chairman, and I also thank the 

ranking member. 

Director McRaith, I want to thank you and your team for the 

2015 annual report. Good job. American families need and value 

quality and affordable insurance to enable their financial stability. 

And I wanted to ask you about a couple of things in the report. 

Last year’s report did not mention title insurance, and I am happy 

to see that this year’s report does mention title insurance. And I 

have asked for a quote from Treasury’s annual insurance report to 

be shown on the screen, which you can probably recognize up there. 

I guess my question is, could you describe for me how your team 

feels about the present state of affairs regarding reverse competition and kickbacks in the realty industry? 

Mr. MCRAITH. Congressman, I think our report speaks for itself 

in the sense that it is an issue in the insurance sector. It is something that several States have expressed concern about. We think 

State regulators, the States should be looking at this closely. We 

look to monitor and assess those developments as we move forward. 

Mr. ELLISON. Thanks a lot. In your view, is it unusual in the insurance world for a referral source to receive compensation either 

at a lower desk rents, tickets to special events, or shared ownership 

in other insurance products? Is that unusual? 

Mr. MCRAITH. I hesitate to comment on what is typical or usual 

or unusual other than to say, clearly, in some cases, those practices 

were abusive, and law enforcement and others looked at them very 

closely. 

Mr. ELLISON. Would strict liability in this industry, that is requiring underwriters to have equal financial liability for all of the 

actions of agents ensure that home buyers get services in their own 

best interests? 

Mr. MCRAITH. Forgive me for not wanting to offer a view on the 

question of strict liability or appropriate causes of action, but I 

think we are focused on the issues with insurance and look to support this committee and your interest in this subject. 

Mr. ELLISON. Thank you for your hard work. 

Mr. Huff, I have a question for you, sir. Why should a referral 

source receive a financial benefit for the referral? Why should a 

REALTOR®, mortgage broker or builder benefit from referring a 

home buyer to a title insurance agent? 

Mr. HUFF. That is an area we are exploring very heavily. I know 

you have spoken to my colleague, Minnesota Insurance Commissioner Mike Rothman. He is very interested in this issue. We have 

established our NAIC title insurance task force. They continue to 

discuss the issue of affiliated title insurers and ways to avoid conflicted referral advice from entities we regulate that play a role in 

a home purchase transaction, which, as you know, for many people, 

that is the biggest transaction of their lives. 

So we have reached out to stakeholders. The task force is meeting, collecting comments from regulators. And we will discuss this 

further at our fall national meeting, which is being held in MaryVerDate Nov 24 2008 14:43 Sep 15, 2016 Jkt 099751 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 K:\DOCS\99751.TXT TERI
32 

land this year. So, in fact, I think we have reached out to your staff 

to invite them to hear what is going on in that task force. So this 

is an issue that is receiving regulatory attention. 

Mr. ELLISON. I appreciate it, and I want to say thank you to you 

as well. I wonder if you might comment on the National Association of Insurance Commissioners and what they are doing to ensure home buyers are not harmed by reverse competition and conflicted referrals? 

Mr. HUFF. Through this task force, that is sort of the starting 

point, if you will, for insurance regulators to come together, and 

then they will make a decision at that task force whether there is 

action required. And then there are a variety of ways to do that. 

We can go through a model law, if you will, or a model regulation 

and then decide how that is teed up for the States to consider at 

adoption. 

Mr. ELLISON. I want to say thank you for your work. I have a 

bill, Ensure Fair Practices in Title Insurance, H.R. 1799, and my 

bill prohibits the financial benefit for a referral. So I would welcome your input, and I just want to say thank you to the panel. 

And I will I yield back my 25 remaining seconds to the Chair. 

Chairman LUETKEMEYER. I thank the gentleman for yielding. 

I would like to thank the witnesses for their testimony today. 

You guys have been great, fantastic, as a matter of fact. 

I know I mentioned a while ago that one of the important aspects 

of this committee is oversight. I know in talking to Mr. Sullivan 

and Mr. McRaith that they made comments to me that our oversight, the willingness of us to delve into issues and to support them 

and to push for certain protections for our insurance industry gives 

them the ability to push back at the international level in their discussions. So I think it is important that we continue to make that 

point to them that we are here to push back or help them push 

back. And we are here to protect the domestic insurance companies 

and want to work with them with regard to international capital 

standards as well. 

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

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

materials to the Chair for inclusion in the record. 

And with that, this hearing is adjourned. 

[Whereupon, at 3:55 p.m., the hearing was adjourned.] 

(33) 

A P P E N D I X 

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