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97–357 PDF 2015

S. HRG. 114–98 

THE STATE OF THE INSURANCE INDUSTRY AND 

INSURANCE REGULATIONS 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE UNIQUE ASPECTS OF THE INSURANCE INDUSTRY, THE 

DEVELOPMENT AND IMPLICATIONS OF DOMESTIC AND INTERNATIONAL CAPITAL STANDARDS, AND EVALUATE THE CURRENT 

STATE OF INSURANCE REGULATION IN THE UNITED STATES AND 

ABROAD 

APRIL 28, 2015 

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

( 

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

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MICHAEL CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

CHAD DAVIS, Professional Staff Member 

SHELBY BEGANY, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

MEGAN CHENEY, Democratic Legislative Assistant 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, APRIL 28, 2015 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

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

WITNESSES 

S. Roy Woodall, Jr., Independent Member with Insurance Expertise, Financial 

Stability Oversight Council ................................................................................. 4 

Prepared statement .......................................................................................... 25 

Responses to written questions of: 

Senator Vitter ............................................................................................ 40 

Senator Toomey ......................................................................................... 40 

Mark E. Van Der Weide, Deputy Director, Division of Banking Supervision 

and Regulation, Board of Governors of the Federal Reserve ........................... 6 

Prepared statement .......................................................................................... 28 

Michael McRaith, Director, Federal Insurance Office, Department of the 

Treasury ................................................................................................................ 7 

Prepared statement .......................................................................................... 30 

Responses to written questions of: 

Senator Vitter ............................................................................................ 41 

Senator Toomey ......................................................................................... 42 

Kevin M. McCarty, Commissioner, Florida Office of Insurance Regulation, 

on behalf of the National Association of Insurance Commissioners ................ 9 

Prepared statement .......................................................................................... 36 

Responses to written questions of: 

Senator Vitter ............................................................................................ 43 

Senator Toomey ......................................................................................... 43 

Senator Heller ........................................................................................... 45 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from Benjamin M. Lawsky, Superintendant of Financial Services, New 

York State Department of Financial Services, submitted by Senator Brown . 46 

Examples of Incentives for Annuity Brokers, submitted by Senator Warren .... 49 

(III)

(1) 

THE STATE OF THE INSURANCE INDUSTRY 

AND INSURANCE REGULATIONS 

TUESDAY, APRIL 28, 2015 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

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

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The hearing will come to order. 

Today the Committee will examine several issues of importance 

to the insurance industry both domestically and internationally. 

Dodd-Frank drastically altered the regulatory landscape for insurers. It imposed a Federal regulatory framework on some insurers, despite a clear exemption that exists under the 1945 

McCarran-Ferguson Act. 

As a result, current law subjects certain insurance companies to 

regulatory requirements similar to those for banks. And while supporters of the existing regime claim that the law provides enough 

flexibility to account for differences between banks and insurers, 

many critics believe that it does not. 

As a liability-driven business, insurance often has long-term 

cash-flow patterns compared to shorter-term activities at banks. 

Consequently, current law fails, I believe, to adequately account for 

the business model and risk profile of insurance companies, and 

that should concern us all. 

Last Congress, we passed the so-called Collins fix to make clear 

that the Federal Reserve has the flexibility to structure capital 

standards for insurers based on their unique nature. Initially, the 

Federal Reserve proposed capital standards that, if applied to insurers, would have been all too similar to the capital standards for 

banks. 

Recognizing this to be a mistake, the Federal Reserve then initiated a Quantitative Impact Study, or QIS, to better understand 

how to design a capital framework for the insurance holding companies that it supervises. I welcomed this development as I have 

always believed that a strong empirical analysis should inform our 

regulatory rulemaking process. 

It would be unfortunate, I believe, if the Fed uses the QIS process solely to buy time for international insurance capital standards 

to be developed and subsequently adopted here in the U.S. An 

2 

international regulatory regime, I believe, should not dictate how 

U.S. regulators supervise American or U.S.-based companies. 

For example, decisions made at the Financial Stability Board, or 

FSB, have been adopted in the U.S. by the FSOC with what appears to be little independent evaluation. I have publicly expressed 

my concerns with both the FSB and the FSOC processes. 

The FSB, remember, is not a U.S. regulator, and it is not accountable to Congress or the American people. Therefore, the 

FSOC should not merely be a rubber stamp for the decisions made 

by an unaccountable international body like the FSB. 

The Treasury Secretary, who also chairs the FSOC, has told this 

Committee that the FSB’s decisions do not bind the FSOC. The 

FSOC’s recent actions, however, leave us to wonder if some of the 

FSOC members agree with Secretary Lew on this point. 

When it comes to insurance, our regulators should acknowledge 

that the U.S. insurance industry is structured and operates differently than its European counterparts. Our representatives to 

these international discussions must ensure that their positions, 

and especially any resulting agreements, recognize these differences and do not disadvantage U.S. companies. The insurance 

industry has traditionally weathered economic downturns relatively well, and the State-based regulatory framework generally 

works to protect policyholders. 

Today’s panel will help us better understand the unique nature 

of insurance, and hopefully shed light on how to appropriately take 

into account the differences between banking and insurance. The 

Committee can then consider whether any changes need to be 

made to current law. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. Thank you to the 

four witnesses today for joining us. Insurance matters to my State. 

In addition to the millions of insurance consumers in Ohio, the city 

of Columbus is second in the Nation in concentration of insurance 

jobs behind only Hartford. 

Insurance became an area of great concern to all of us in 2008 

when the near failure and bailout of insurance giant AIG was a 

central event in the financial crisis, as we know. AIG realized 40 

percent of the loss—45 percent of the losses of all insurance in 

2008 and received 55 percent of the Government’s support provided 

to insurers. 

Dodd-Frank contains a number of provisions to prevent another 

AIG from happening again, including: creating FSOC, a single entity responsible for examining risks facing our entire financial system; identifying systemic financial firms and encouraging the regulation of risky activities; regulating derivatives, including credit default swaps, eliminating the Office of Thrift Supervision; moving 

thrift regulation to the Federal Reserve; creating nonbank systemically important financial institution designations; and requiring 

enhanced capital and leverage rules for nonbank SIFIs, including 

insurance companies. 

Few laws, of course, are perfect. Last year, Congress passed and 

the President signed into law legislation that Senator Collins, SenVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
3 

ator Johanns, and I introduced to address a specific unintended 

consequence of Section 171 of Dodd-Frank, known as the Collins 

amendment. The Insurance Capital Standards Clarification Act allowed the Fed to tailor capital rules to the insurance business 

model. I look forward to hearing about the Fed’s ongoing implementation of that legislation, how it plans to design capital requirements for savings and loan holding companies and nonbank SIFIs. 

I also look forward to hearing about international developments, 

as the Chairman mentioned. In order for our insurance companies 

small and large to succeed, all of our witnesses today need to be 

working together on international insurance issues. 

Finally, I am interested in hearing about how State and Federal 

regulators are identifying and addressing emerging risks in the insurance markets, including captive reinsurance, private equity 

ownership, and reaching for yield. 

You all have seats on FSOC where identifying emerging risks is 

part of preventing the next financial crisis. While I believe that traditional insurance is obviously a distinct business from banking 

and should be treated as such, it is important to remember, 

though, that institutions often condone regulated activities in socalled shadow banking. Special purpose vehicles, SPVs, that played 

a significant role in the financial crisis seem to be making their 

way back into the insurance market. And we know that insurers 

can engage in a wide range of activities from derivatives to securities lending. 

As we move further and further away from 2008, we cannot forget what happened. We should not take our eyes off potential 

sources of risk to policyholders and more broadly to the financial 

system. Each of our witnesses today plays an important role in the 

regulatory framework for insurance companies. I look forward to 

each of your perspectives on domestic and international issues. 

Thank you. 

Chairman SHELBY. Thank you, Senator Brown. 

First we will hear from the Honorable Roy Woodall, who currently serves as the Independent Member with Insurance Expertise 

on the Financial Stability Oversight Council. 

Next we have Mr. Mark Van Der Weide from the Federal Reserve. He serves as the Deputy Director of the Division of Banking 

Supervision and Regulation, under which regulation of the insurance industry currently falls. 

Third we will hear from Mr. Michael McRaith, the Director of the 

Federal Insurance Office. 

And, finally, we will hear from Mr. Kevin McCarty, Commissioner of the Florida Office of Insurance Regulation, who will today 

testify on behalf of the National Association of Insurance Commissioners, of which he is a former president and has worked closely 

with on international insurance issues. 

All of your written testimony will be made part of the hearing 

record. Mr. Woodall, we will start with you, if you will sum up your 

remarks. Welcome. 

4 

STATEMENT OF S. ROY WOODALL, JR., INDEPENDENT MEMBER WITH INSURANCE EXPERTISE, FINANCIAL STABILITY 

OVERSIGHT COUNCIL 

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

Brown, and Members of the Committee, for inviting me to appear 

before you today. This is my second appearance before the Committee, and I truly appreciate the opportunity to share my thoughts 

with you on this important topic. 

After a career in the insurance sector and its regulation that 

began in 1961, I was asked in 2002 to assist the Department of the 

Treasury for 1 year with the implementation of the Terrorism Risk 

Insurance Act, but I ended up staying for 8 years, during Republican and Democratic administrations, and serving under four different Treasury Secretaries. 

While at Treasury, my insurance portfolio was broad, but a recurring theme was insurance regulatory modernization. Legislative 

proposals during that time included an Optional Federal Charter 

for insurers, Federal insurance regulatory standards to be administered by the States, and the creation of the Federal Insurance Office within Treasury. In addition, I was part of the team that led 

Treasury’s involvement in the legislative debate that culminated in 

the passage of the Dodd-Frank Act, with a particular focus on those 

provisions of the law relating to insurance. Ironically, of all of those 

insurance-related provisions in Dodd-Frank, the one that occupied 

the least amount of my time was the three-line section that created 

the position I now fill. 

It was not until the House–Senate conference committee convened that the provision for an insurance member with a voting 

seat on the Council was added to the bill, presumably to be a proxy 

in view of the absence of a Federal insurance regulator. 

After retiring from Treasury, I was nominated by the President 

to be the newly created Independent Member of FSOC and was 

confirmed by the Senate in 2011. Today I am the second longestserving voting member on the Council. 

Having been involved in both the development and the implementation of Dodd-Frank, I think I bring a unique perspective on 

its treatment of insurance, as I have an understanding of how insurance regulatory reform was envisioned as working, where that 

reform has progressed as intended, where implementation has been 

effective, and areas in which it might be improved. 

The Council has now designated four companies as systemically 

important nonbank financial institutions, or SIFIs, after deciding 

that their material financial distress or failure could pose a threat 

to the stability of the United States financial system: AIG, GE Capital, Prudential, and Metlife. I was in the dissenting minority with 

respect to the designation of Prudential and MetLife, but I joined 

the majority in designating AIG and GE Capital. 

I am not here today to debate or rehash any of the SIFI designations. However, as noted in my dissents, I believe the Council’s 

focus should be on the activities of financial firms, the interconnections that might arise from such activities, and any potential 

heightened risks posed by those activities. In my opinion, the preferred approach would be for the Council to examine whether particular activities present systemic risk and, if so, first consider the 

5 

Council’s other options available under Dodd-Frank. If a companyspecific designation does result, however, the Council, in my view, 

should specify the systemically risky or disfavored activities, or the 

combination of these activities, that caused the company to be considered a SIFI. This would provide some guidance as to what activities need to be addressed—not just so the SIFI can ‘‘exit’’ enhanced supervision but, more importantly, so that, over time, the 

company can reduce its ‘‘systemic footprint’’ and thus make the financial system safer and more resilient, which is, after all, the ultimate objective. 

Another issue raised in my dissents is my concern that international regulatory organizations may be attempting to exert what 

I consider to be inappropriate influence on the development of U.S. 

regulatory policy. As you mentioned, in the aftermath of the financial crisis, the G20 created the Financial Stability Board, or FSB, 

with the aim of promoting global financial regulatory reform and 

harmonization. 

To that end, the FSB directed the International Association of Insurance Supervisors, or the IAIS, to develop recommendations as 

to international insurance capital and other standards. These IAIS 

recommendations are ultimately submitted to the FSB for its consideration and international agreement. If consented to, they will 

be targeted at those U.S. insurers designated by the FSB as Global 

SIFIs, as well as those classified as Internationally Active Groups. 

While the U.S. Government can enter into consensual international insurance agreements, it cannot commit to full implementation of those agreements or their underlying international standards, as insurance regulation is primarily the responsibility of the 

States. In the U.S., the decision as to whether and how to implement any FSB insurance-related international standards or policy 

measures resides with the States and their insurance regulators, 

and in some cases with the Fed. 

Under Dodd-Frank, the insurance authorities granted to Treasury and the Fed are limited to prudential or regulatory matters involving insurance—with trade matters being reserved to the USTR. 

The USTR is not here today. It is not a member of the FSB or the 

IAIS, but it has an important role, as envisioned by Congress, especially since international agreements at the FSB may well affect 

market access, directly or indirectly. 

It is this contorted international framework that I will not get 

into—my time is running out—that is why I think we should be 

cautious about ongoing initiatives. 

As the negotiations are ongoing before your Committee, there is 

still time to ensure that any international agreement consented to 

by the FSB is reached through a more open process and that it is 

in the best interests of the United States and its insurance consumers. 

Again, I appreciate the opportunity to appear before you today, 

and I am pleased to answer any questions you may have. I also 

stand ready to assist the Committee as you continue the important 

work of monitoring international developments and improving our 

regulatory framework. 

Chairman SHELBY. Mr. Van Der Weide. 

6 

STATEMENT OF MARK E. VAN DER WEIDE, DEPUTY DIRECTOR, 

DIVISION OF BANKING SUPERVISION AND REGULATION, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE 

Mr. VAN DER WEIDE. Chairman Shelby, Ranking Member Brown, 

and other Members of the Committee, thank you for inviting me 

to testify today on behalf of the Federal Reserve. 

The Federal Reserve welcomes the opportunity to participate in 

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

from the FIO and the NAIC and by the Independent Insurance 

Member of the FSOC. While we each have our own unique authority and mission to carry out, we remain committed to working collaboratively on a wide range of international and domestic insurance issues. 

With the enactment of the Dodd-Frank Act, the Federal Reserve 

assumed responsibility as the consolidated supervisor of insurance 

holding companies that own banks or thrifts, as well as insurance 

holding companies that are designated by the FSOC. 

Since the passage of the act, we have been hard at work creating 

a supervisory framework that is appropriate for the insurance 

groups that we oversee. Our principal supervisory objectives for insurance holding companies are protecting the safety and soundness 

of the consolidated firm and their subsidiary depository institutions, and also mitigating any risks to financial stability. We conduct our consolidated supervision of these firms in coordination 

with State insurance regulators who continue their established 

oversight of the insurance legal entities. 

Congress recently amended the Dodd-Frank Act to enable the 

Federal Reserve to focus on constructing a domestic regulatory capital framework for our supervised insurance holding companies 

that is well tailored to the business of insurance. Since the passage 

of this amendment to the Dodd-Frank Act, the Fed has been engaged extensively with insurance supervisors and insurance firms 

to solicit views on the various approaches to developing an appropriate, consolidated capital regime for insurance holding companies. We are committed to continuing this engagement and to following formal notice and comment rulemaking processes as we 

move forward on our insurance capital work. 

The Federal Reserve is also participating in the development of 

international insurance standards. Some of the insurance holding 

companies that we supervise are internationally active firms that 

compete with other global insurers to provide insurance products to 

businesses and consumers around the world. Accordingly, in November of 2013, the Fed joined our State insurance supervisory colleagues from the NAIC and the FIO as members of the International Association of Insurance Supervisors, or IAIS. 

Through our membership in the IAIS, the Fed has been and will 

continue to be engaged in the development of global standards for 

regulating and supervising internationally active insurers. 

As a general proposition, we believe in the utility of having effective global standards for global financial firms. When implemented 

consistently across jurisdictions, such standards can help provide a 

level playing field for global firms, can help limit regulatory arbitrage and jurisdiction shopping, and can promote financial stability. 

7 

Since joining the IAIS in late 2013, the Federal Reserve has been 

an active participant in several key committees, working groups, 

and work streams. Throughout our first year-and-a-half as a member of the organization and consistent with our statutory mandate, 

we have been particularly focused on the financial stability and 

consolidated supervision work of the IAIS. 

One of the key strategic priorities of the IAIS is the development 

of a supervisory framework and consolidated capital standards for 

internationally active insurance groups. The Federal Reserve supports the construction of groupwide supervisory frameworks and 

consolidated capital standards for international insurance groups, 

so long as they are transparently developed, well tailored to U.S. 

insurance risks, properly calibrated, and complementary to insurance standards at the legal entity level. 

A second key focus of the IAIS involves the identification of global systemically important insurers, or G–SIIs, and the design of an 

enhanced regulatory and supervisory framework for G–SIIs. 

It is important to note that any standards adopted by the IAIS 

are not binding on the Fed, the FIO, State insurance regulators, or 

any U.S. insurance company. And during the buildout of standards 

for global insurance firms by the IAIS, the Fed will work to ensure 

that the standards do not conflict with U.S. law and are appropriate for U.S. insurance markets, U.S. insurance firms, and U.S. 

insurance consumers. 

Moreover, the Fed will only adopt IAIS regulatory standards 

after following the well-established rulemaking protocols under 

U.S. law, which include a transparent process for proposal 

issuance, solicitation of public comment, and rule finalization. 

The Federal Reserve has acted and will continue to act on the 

international insurance stage in an engaged partnership with our 

colleagues from the FIO, State insurance commissioners, and the 

NAIC. Our multiparty dialogue strives to develop a central ‘‘Team 

USA’’ position on the most critical matters of global insurance regulatory policy. 

The Federal Reserve also will continue to actively engage with 

the U.S. insurance industry to help ensure that any global insurance regulatory standards work well for U.S.-based firms. 

Mr. Chairman, thank you for inviting me here today. I look forward to an active dialogue on these issues with you and the other 

members of the Committee. 

Chairman SHELBY. Mr. McRaith. 

STATEMENT OF MICHAEL MCRAITH, DIRECTOR, FEDERAL 

INSURANCE OFFICE, DEPARTMENT OF THE TREASURY 

Mr. MCRAITH. Chairman Shelby, Ranking Member Brown, Members of the Committee, thanks for inviting me to testify this morning. I am pleased to be here with my colleagues on this panel. 

We released the Federal Insurance Office’s second annual report 

on the insurance industry in September of 2014. The report cited 

2013 data showing the U.S. industry reported record surplus levels 

of approximately $990 billion. Non-health insurers collected more 

than $1.1 trillion in premiums in 2013, or nearly 7 percent of GDP. 

The report also cites data showing that private market volume 

is increasing dramatically in developing countries. For example, 

8 

China’s private insurance market increased by more than $137 billion in the last 5 years, South Korea by nearly $50 billion, and 

Brazil by more than $41 billion in that same period. These facts 

illustrate the globalization of the insurance market and explain the 

increased focus on global standards. 

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 U.S. at the 

International Association of Insurance Supervisors. 

In this work, we collaborate extensively with our colleagues at 

the Federal Reserve and the State regulators, including my two colleagues on this panel. Our U.S. multipart supervisory structure 

must be coordinated in order for the U.S. to assert leadership in 

international developments. That is exactly what happens today. 

International insurance standards are not new. The IAIS was 

formed in 1994. In fact, State regulators were among the founding 

members. International standards reflect best practices based on 

collective analysis and the judgment of the participants. 

Importantly, international standards are not self-executing in the 

U.S. Federal and State authorities will study, test, and analyze the 

potential value and impact of any international standard prior to 

implementation. 

We have the most diverse and competitive insurance market in 

the world, with insurers that operate in one part of one State and 

insurers that are multinational and engaged in a variety of financial services. With this in mind, we work with our international 

counterparts to build a global consensus that works for the United 

States. Simply put, international standards must, when implemented, serve the interests of U.S. consumers and industry and our 

national economy. 

The IAIS recently completed structural reform. These changes 

eliminated the pay-for-play dynamic and increased the IAIS’ transparency and independence. No longer will the IAIS depend upon 

the $20,400 annual fee paid by industry observers. Now open meetings and information will be available to all stakeholders, not just 

those who can afford the annual fee. Consultation with stakeholders will be more rigorous and uniform. After 12 months of extensive public consideration, the IAIS implemented in 2015 a better approach to both governance and transparency. 

At FIO, we continue to create opportunities for stakeholders to 

meet in one place with all U.S. IAIS participants and look forward 

to increasing those opportunities. 

In 2015, we have continued with the EU–U.S. Insurance Project. 

The EU and the U.S. are two important jurisdictions both as markets and as homes for insurers. With the collaboration of State regulators, we have worked with our EU counterparts to improve understanding and compatibility where appropriate. 

One objective identified in the project is a covered agreement. It 

is not a trade agreement. A covered agreement is an agreement between the United States and another country involving prudential 

insurance measures. We look forward to engaging with this Committee before and during the negotiations of a covered agreement. 

The U.S. market and its oversight are unique. Through effective 

collaboration at home and abroad, U.S. authorities will continue to 

9 

provide leadership that complements our shared interest in a vibrant, well-regulated market that promotes competition and financial stability and 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. 

Chairman SHELBY. Mr. McCarty. 

STATEMENT OF KEVIN M. MCCARTY, COMMISSIONER, FLORIDA OFFICE OF INSURANCE REGULATION, ON BEHALF OF 

THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Mr. MCCARTY. Chairman Shelby, Ranking Member Brown, and 

Members of the Committee, thank you for inviting me to testify 

today. 

The U.S. insurance market is the largest and most competitive 

in the world. Taken individually, U.S. States make up about half 

of the world’s 50 largest insurance markets. My home State of Florida, for example, is the 12th largest insurance jurisdiction in the 

world. State regulators cooperate closely on a regular basis to provide leadership on global insurance issues and activities, with a 

focus on policyholder protections and maintaining stable and competitive markets. 

As domestic and global capital rules for insurers are discussed 

and developed, State regulators continue to oppose a one-size-fitsall, bank-centric set of regulations and focus instead on the importance of company- and product-specific analysis and examination. 

Capital requirements are important, but if imposed incorrectly or 

without regard to differences in products and institutions, they can 

be onerous to companies, harmful to policyholders, and may even 

encourage new risk taking in the insurance industry. Any capital 

requirement must be adaptable to our markets and benefit our consumers. 

It is also important to keep in mind that any new standards are 

in addition to, and not in lieu of, State risk-based capital requirements applicable to insurers within groups. Domestically, we encourage the Fed to work closely with us to ensure that standards 

complement our existing regulatory authority. We supported the 

passage of legislation last year to give flexibility to the Federal Reserve to tailor its capital requirements for companies subject to 

their regulation, and we are hopeful that they will now use this 

flexibility to craft rules consistent with the insurance business 

model and our legal entity regulation. 

Internationally, the IAIS is developing capital proposals for internationally active groups, including many firms based in the United 

States. We have serious concerns about the process and the aggressive timeline given legal, regulatory, and accounting differences 

across the globe. All the same, we are fully engaged in the process 

to ensure that any standard appropriately reflects the risk characteristics of the underlying business and does not lead to unintended 

consequences such as limiting products or stagnating growth, jobs, 

and innovation. 

10 

While we are committed to collaborating with our Federal and 

foreign counterparts where we can, we have a responsibility to the 

U.S. insurance sector. We will not implement any international 

standard that is inconsistent with our time-tested solvency regime 

that puts policyholders first. 

Critical to the credibility of the decision making at the IAIS is 

an inclusive and transparent process. We agree that the pay-toplay structure had to go, but we remain concerned with the new 

IAIS stakeholder and consultation process. We will continue to advocate for increased transparency and encourage our Federal colleagues to support this worthy goal. 

We are also concerned with the lack of transparency at the FSB. 

While we appreciate the role of the Fed, the Treasury, and the SEC 

as members of the FSB, we have only limited access to the FSB 

discussions directly relevant to the sector that we regulate. What 

little participation we do have has only occurred as a representative of the IAIS, even after requesting inclusion from U.S. FSB representatives. Particularly given the role of the FSB in designating 

U.S. insurers as G–SIIs, we find the lack of support for our inclusion by our Federal colleagues troubling and not in the best interests of U.S. insurers and their policyholders. 

For our part, the NAIC has longstanding procedures and ongoing 

responsibilities to seek input from consumers and other interested 

parties. We will continue working on these issues through an open, 

transparent NAIC process. To that end, last year, the NAIC formed 

the ComFrame Development and Analysis Working Group, known 

as CDAWG, which I chair, to provide ongoing review of ComFrame 

and international group capital development standards. CDAWG is 

also exploring group capital concepts that would be appropriate for 

U.S.-based internationally active group insurance companies and 

provide comprehensive feedback to the IAIS regarding their proposed ICS. 

We also expect to finalize NAIC’s updated position statements on 

ComFrame and international capital developments shortly, which 

we will be happy to share with your Committee. 

In conclusion, State regulators have a strong track record of effective collaboration and supervision. We remain committed to coordinating with our Federal counterparts. We also take seriously 

our obligation to engage internationally in those areas that impact 

the U.S. economy, companies, and consumers. State-based regulation is always evolving to meet challenges posed by dynamic markets, and we continue to believe that well-regulated markets at 

home and abroad make for well-protected policyholders. 

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

NAIC. 

Chairman SHELBY. Thank you, Mr. McCarty. 

I will start with you, Mr. Woodall. Each of the three insurers 

designated by FSOC were also designated by the Financial Stability Board, FSB. Two of the companies were designated by FSOC 

after they were designated by the FSB. 

Sir, have you attended the FSB meetings that led to the designation of insurance companies? 

Mr. WOODALL. No, Senator, I have not. I am not a member of 

any of the international bodies. 

11 

Chairman SHELBY. OK. Does FSOC take into account FSB designations when considering which nonbanks should be designated? 

And if so, how? 

Mr. WOODALL. Well, essentially FSOC has its own methodology. 

Chairman SHELBY. I know. 

Mr. WOODALL. And the IAIS and FSB have their methodology. 

They are very similar. They are distinct in that one is for one organization and one is for the other. But my position has been they 

are not dissimilar, and the latest GAO report actually showed a 

chart and compared the methodology of the international to what 

the methodology of FSOC was and found them very similar. 

Chairman SHELBY. Interesting. Mr. Van Der Weide, Section 171 

of Dodd-Frank, which we call the ‘‘Collins amendment,’’ Collins and 

others, requires the Federal Reserve to establish minimum leverage and risk-based capital standards for nonbanks that it supervises. Based in part on the Fed’s indication that it lacked the ability to tailor these rules for insurers, Congress gave the Fed additional authority for insurers. 

When will the Fed propose a capital rule for insurers under its 

supervision? And will the Fed issue an Advance Notice of Proposed 

Rulemaking before issuing proposed rules? In other words, where 

are you? 

Mr. VAN DER WEIDE. Yes. So we very much appreciate the 

amendment to the Dodd-Frank Act a few months ago that has enabled us to tailor our forthcoming insurance capital standards to 

the actual risks of insurance firms. We think that is going to enable us to produce a better outcome. And we are very much committed to tailoring the forthcoming rule to the risks of the insurance firms that we supervise. 

We are in the engagement with industry, data collection, and 

analysis phase of our work at this point. We are engaging quite extensively with regulated insurance firms, with trade associations, 

with members of the public, and with State and other regulators 

of insurance to explore the pros and cons of various approaches 

that are possible for the Fed’s capital rule. We are in the early 

phases of that work. We will be issuing a proposed rule so that, in 

addition to the ad hoc engagement that we have been doing with 

insurance firms and insurance supervisors, we will also go through 

a formal rulemaking process where we issue a proposed rule for 

comment. But I cannot give you a timeline as to when that proposed rule is going to come out. At this point we are collecting information, and we want to make sure we get the proposal right. 

Chairman SHELBY. Thank you. 

Mr. McCarty, I understand that the insurance industry’s focus in 

the U.S. has traditionally been on protecting the individual policyholders while European models traditionally focus more on preventing the failure of a company. Could you elaborate for the Committee on these differences and what importing a European standard would mean for the U.S. markets? 

Mr. MCCARTY. Well, there are very fundamentally different ways 

of viewing the world. The U.S. system has always been predicated 

on policyholder protection, and when you pursue that particular 

line of philosophy, that engenders a different kind of policy response. For instance, we allow companies to fail as long as there 

12 

is capital sufficient to make sure that the policyholders are made 

good on their contracts. A very different model than the European 

system where you are looking really at creditors’ protection, which 

gives a whole different flavor. I think when you try to harmonize 

those two, it would create the potential for great disruption in the 

delivery of different services in the marketplace and potentially 

raises prices for consumers in the United States and potentially 

jeopardizes the availability of products. 

Chairman SHELBY. Mr. McRaith, I continue to hear reports of 

differing positions being held by U.S. representatives in the International Association of Insurance Supervisors discussions despite 

modest recent progress. It seems to me that if we are going to participate in these discussions, we should speak with one voice, and 

that voice should strongly advocate for standards that adhere to 

the U.S. insurance model. 

Do you agree with this? And if so, what will the Federal Insurance Office do to ensure that this occurs? 

Mr. MCRAITH. Mr. Chairman, I do agree with your statement 

and the objective. That is exactly why we spend so much time coordinating with the States and the Federal Reserve. We have a 

unique multipart structure in the United States in terms of insurance oversight. It is essential that we work together and coordinate. We do it in some cases on the technical subjects. Our teams 

are in contact every day. At the leadership level, we have regularly 

scheduled calls and meetings, frequent interaction. It is a relatively 

new apparatus, if you will. As you know, in the last few years our 

office was created; the Federal Reserve assumed its role. I think we 

have worked through the kinks. We are continuing to improve our 

process. 

Chairman SHELBY. I want to go to a last question to Mr. Van Der 

Weide of the Fed. Will you publish the results of the QIS before 

the proposed rule? Where are you there? 

Mr. VAN DER WEIDE. Yes, so last year we conducted a fairly extensive Quantitative Impact Study, or QIS, of the U.S. insurance 

industry. This QIS was conducted before the Dodd-Frank Act had 

been changed to provide the Federal Reserve with the flexibility to 

adopt a fully insurance-centric capital model. 

Chairman SHELBY. How important is that? 

Mr. VAN DER WEIDE. It is pretty important. A lot of the data 

that we collected was based on what was then our legal restriction, 

and we were at that point required, in our view, to adopt a more 

bank-centric regulatory capital framework for these firms. So we 

collected an extensive amount of information on that form of a capital requirement for insurance firms. But now that the Congress 

has amended the Dodd-Frank Act to give us the freedom to do an 

insurance-centric capital rule, a lot of that information is no longer 

going to be relevant to the path forward. 

So the information was important, and it helped us to understand a lot of the insurance risk that the firms had. But now that 

the law has changed and we have freedom to develop an insurancecentric capital rule, the results of that QIS are no longer as relevant as they had been. 

Chairman SHELBY. Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

13 

Mr. Van Der Weide, let me start with you. I was encouraged that 

you said in your testimony that you are consulting with State supervisors and industry in developing capital standards. That is especially important. In the past, I have urged the Fed to lead, not 

follow, when negotiating international bank capital standards. I 

feel the same way about insurance capital. 

When we implemented Basel III in the U.S., regulators made 

changes to some risk weighting and to the leverage ratio. The Fed 

departed from the Financial Stability Board, from the FSB’s proposal for SIFI surcharges for the largest banks. I think that was 

the right decision also. 

Do you agree that U.S. regulators have the discretion to implement international financial agreements, including insurance capital standards, as they see appropriate for U.S. companies? Do you 

have that discretion? 

Mr. VAN DER WEIDE. Yes. It has long been true in the banking 

context—and it will be true in the insurance context as well—that 

as a general matter, a fair amount of national discretion is provided to each jurisdiction as to how to implement the international 

standard. And we would plan to use that national discretion to 

make sure that any of the international standards that come out 

are as well tailored as possible to the risks of the U.S. insurance 

market. 

Senator BROWN. Good. Thank you. 

Mr. McCarty, the Federal Insurance Office’s Insurance Modernization Report in 2014, annual report, as well as FSOC’s 2014 

annual report, all identified concerns with captive reinsurance. 

New York’s banking superintendent Ben Lawsky calls it ‘‘shadow 

insurance.’’ He has submitted a statement for today’s hearing in 

which he says, and I quote, ‘‘It is a troubling regulatory loophole 

that threatens the financial stability of the insurance market, puts 

everyday policyholders at substantial risks, and provides billions of 

dollars in unearned tax deductions to large multinational corporations.’’ 

Mr. Chairman, I would ask, if I could, unanimous consent to 

enter Mr. Lawsky’s letter into the record. 

Chairman SHELBY. Without objection. 

Senator BROWN. Thank you. 

The NAIC has released a revised proposal to address shadow insurance, as you know. Many believe that proposal is insufficient. 

When do you expect, Mr. McCarty, forceful action to address a 

practice that allows companies to overstate their capital that exposes policyholders and the financial system to risk? 

Mr. MCCARTY. Well, first of all, we have been cognizant of this 

issue for a number of years. In 2011, we first formed a task force 

to look at the use of captives. The issue really arose out of the fact 

that products have been evolving and changing over the years. A 

number of formalistic approaches that were in place for traditional 

types of reinsurance were found to be lacking because of the changing and evolving marketplace. And one of the ways of addressing 

that was to use captives to provide relief, if you will, for those. I 

made it my goal as NAIC president in 2012 to implement a principal-based reserving which would right-size the reserving so we 

had a more appropriate reserving protocol addressing all across 

14 

AXXX and XXX products. We believe we have put in examination 

and transparency provisions. We are addressing the issue of shadow banking by—or shadow issues by having—both the ceded State 

and the ceding State have to agree with the transaction. We are 

putting more transparency in the process. We have organized the 

Financial Analysis Working Group to evaluate these going forward. 

It is also our plan to look at other areas of potential captive 

abuse. We understand that it is a problem. We are dumping an 

enormous amount of resources into this situation, and we will continue to monitor this and report to you the progress that we make. 

Senator BROWN. If the proposal was initially insufficient, as some 

have claimed, are you making up for that? 

Mr. MCCARTY. No, I think that—the way the process works is 

you put proposals out there, and you look at ways of perhaps 

strengthening that proposal and addressing the shortcomings, and 

we are still engaged in that process and will continue to do so. It 

is our sincere desire as an organization to close those loopholes and 

to ensure that there are not any abuses in the captive systems 

going forward. 

Senator BROWN. Thank you. 

Mr. McRaith, do you have any comments on Mr. McCarty’s comments? 

Mr. MCRAITH. Briefly. The proliferation of captives is a concern. 

It is a concern in some ways less on the industry side. We think 

most of the industry participants are using these in a responsible 

fashion. But what it does is highlight differences between the 

States, and we have concerns about the proverbial race to the bottom. We know the States have confronted serious issues like this 

before and met the challenge. So that in the late 1980s, early 

1990s, States developed an accreditation program, developed statutory accounting in the late 1990s. We think that States will meet 

the challenge. It is less on the substance of the oversight, more on 

the implementation and consistency State to State. 

Senator BROWN. Thank you. 

Mr. McCarty, one last question for you. A recent Goldman Sachs 

asset management survey of insurance executives found that U.S. 

insurers are looking to invest in less liquid assets like private equity and hedge funds, commercial mortgage loans, midsized business loans, and securitized credit. Insurers are also likely to 

outsource some of these investments to third-party asset managers 

because they lack the systems or the infrastructure to do it themselves. 

How are State regulators monitoring these investments, including the third-party asset managers—— 

Mr. MCCARTY. Yes, we are very concerned about the role that equity hedge funds are playing with regard to—there have been some 

issues that have been raised, we have seen in articles recently in 

newspapers. We have formed a specific working group to address 

these issues, a way of addressing this in the long term. 

Senator BROWN. Anyone else want to comment on that? 

Mr. MCRAITH. Very briefly, Senator, the article points to the 

need for vigilance and real diligence at the State regulatory level 

and from all supervisors to monitor the inflow of unconventional 

capital into the insurance space. 

15 

Senator BROWN. Mr. Woodall. 

Mr. WOODALL. In that report, in that survey—really it is a survey—when you get into as far as trying to farm out some of these 

activities, I think that the charts show that it is a pretty low percentage, maybe 12 percent, even considering that. That is what 

really it was. It was a survey by Goldman Sachs, and it was just 

reflecting what they were told by the companies. 

Senator BROWN. Thanks. 

Chairman SHELBY. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

Mr. McCarty, the National Association of Insurance Commissioners has a long history of successfully regulating and working 

through with the different States the business of insurance, and I 

might say successfully regulating over an extended period of time. 

When I was a State legislator, we worked using model legislation 

from the National Association of Insurance Commissioners, which 

we put in and changed the health insurance laws within our State, 

and we ended up with approximately 93 percent of all of our individuals having the opportunity to purchase insurance because of 

those model pieces of legislation, and it enhanced the market. 

I have been very impressed over a period of years—and I was an 

actually an independent insurance agent in South Dakota, and I 

was very pleased with the way that the NAIC worked through a 

number of issues. 

I am just curious. With regard to the NAIC, are there situations 

out here in which the changes that have been brought about from 

2007 forward through the initiation of Dodd-Frank and all that 

goes with it, has this helped the National Association of Insurance 

Commissioners to do their job? Or have you found those changes 

and the further involvement at the Federal level, have you found 

that to be a detriment in terms of being able to assist in the regulatory process? 

Mr. MCCARTY. Well, if you look at the aftermath of the financial 

crisis and the enactment of Dodd-Frank, Dodd-Frank for all intents 

and purposes left the State regulatory system intact, and I think 

that was congressional recognition that the States have been an effective force in protecting consumers and weathering through the 

financial crisis identifying, of course, the role of the Federal Insurance Office to help identify gaps, to be the voice of the U.S. Government as appropriate at the IAIS. So I think that, you know, there 

has arguably been some improvements. 

We are, you know, finding our way in a new framework, and I 

think that the NAIC has really redoubled its efforts to try to identify through our Solvency Modernization Initiative to see what 

things we could do enhancing our Holding Company Act, for instance, looking at best practices around the world by using an own 

risk assessment like ORSA in our system and other ways to improve our regulatory system. 

So we saw the challenges of the financial crisis as an opportunity 

to really bring out the best that the NAIC has to offer, which is 

to look at best practices around the country, around the world, and 

strengthening our solvency regime. 

Senator ROUNDS. What has been your biggest challenge in finding your way? 

16 

Mr. MCCARTY. You know, I think that the struggles really have 

been—I think our biggest struggle to date really has to deal with 

our captives. I think we have done a lot to address the holding 

company—we have enhanced our Holding Company Act. I think 

our Holding Company Act would be comparable to what is being 

used as the standard around the world. 

I think we have had good success in our reinsurance collateral 

reduction. You know, our goal this year is to be at 93 percent, 

which is a monumental achievement. 

I think one of the things that challenges us is the fast changing 

world and the fast changing dynamics that requires us to change 

our business practices at home for us to have more rapid response 

teams, to have deliverables in a more timely fashion, and to coordinate our work with the Federal Reserve and FIO on the international arena so that, to the best of our ability, despite very different cultures and a very different view of the world, we have to 

do our best to come up with a ‘‘Team USA’’ response which I think 

strengthens our position globally and will have an impression on 

the development of the ICS as well as ComFrame. 

Senator ROUNDS. Thank you. 

Mr. Woodall, I noted in the testimony that you had provided to 

us earlier, you noted that the international insurance capital agreements contain, as you put it, ‘‘risks of unintended negative effects 

on the U.S. insurance consumers.’’ Can you provide me with some 

examples of what these potential negative effects might be? 

Mr. WOODALL. Well, when you are talking about potential, you 

do not know how negative they would be. But what I am saying 

is that when you do that, even though you are talking about prudential agreements, that is a very thin line between that and what 

a trade agreement might be, because it could affect access of companies abroad, like trade would do, either directly or indirectly. 

And that is what I was saying that we do not know when those 

things are being worked out at the international level, how they 

might affect it. And that is why it is so important that it be administered through the regulatory system that is set in place by Congress with the States and now with the Fed from Dodd-Frank. 

Senator ROUNDS. Thank you. 

Mr. Chairman, thank you. 

Chairman SHELBY. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. I want to thank you 

all for your testimony today, very, very good. And a special welcome to Senator Nelson. It is good to see you here back on the Hill. 

I am going to start with you, Director McRaith. Senator Heller 

and I introduced the International Insurance Capital Standards 

Accountability Act yesterday, and this bill would require the Federal Reserve to create an Advisory Community on International Insurance Standards. I know that FIO already has an advisory committee. Could you briefly tell me how that is working out for you? 

Mr. MCRAITH. Sure. So we were able to establish an advisory 

committee pursuant to the Federal Advisory Committee Act. We 

did not need a statutory requirement. 

Senator TESTER. Right. 

Mr. MCRAITH. We have excellent contributions on that committee 

from State regulators, former—Commissioner Lindeen is as former 

17 

member. We are learning how to make the best use of the time of 

those members. But we also receive advice and consult with stakeholders through many avenues, not just through our advisory committee. 

Senator TESTER. Yes. But you consider that a positive avenue for 

getting information? 

Mr. MCRAITH. We welcome advice and perspective in every opportunity. 

Senator TESTER. Good. Now, you were directed by FSB to develop 

some international insurance standards, correct? And how often do 

you meet, the IAIS? 

Mr. MCRAITH. The IAIS, at a technical level, meets frequently. 

In fact, a few weeks ago there were meetings in New York for a 

couple days, followed by a full-day public session. There is another 

public session, I think in New York, on May 6th. 

Senator TESTER. All right. Are these advertised? 

Mr. MCRAITH. Yes, these public sessions are well known. 

Senator TESTER. And what is the difference between the technical level and the public level? 

Mr. MCRAITH. So the technical level, the technical experts from 

around the world—the NAIC, the Federal Reserve, our office—will 

all meet with their counterparts around the world and discuss the 

important technical issues, for example, in the development of a 

capital standard. 

Senator TESTER. All right. Are there observers in the technicallevel meetings? 

Mr. MCRAITH. The observers are—that is the value of the fullday public session. So there are a few days of meetings where ideas 

are developed. There is then a sharing of those ideas throughout 

the year. In fact, I think notably last year there were 12 hours for 

that subject; this year there are already 60 hours scheduled. 

Senator TESTER. So when you have public meetings, you have 

consumer groups, advocates, and companies that can come? 

Mr. MCRAITH. In fact, yes. This year—— 

Senator TESTER. OK. So—— 

Mr. MCRAITH. Last year, it was restricted to those who paid the 

fee. This year, anybody—— 

Senator TESTER. No, and we are not for the pay-to-play stuff. But 

they can come. 

Mr. MCRAITH. That is right. 

Senator TESTER. Are they invited, do they have to be invited? Or 

can they just show up? 

Mr. MCRAITH. No, for the public sessions any person—your 

staff—— 

Senator TESTER. So that is good. So can you tell me why they are 

not allowed at the technical session? Or are they allowed? 

Mr. MCRAITH. So the technical developments, again, brings people from around the world—— 

Senator TESTER. I got you. 

Mr. MCRAITH. ——with different perspectives. 

Senator TESTER. But why wouldn’t you allow folks from industry 

and consumer groups, companies, advocates to listen? 

Mr. MCRAITH. So those—any work product generated by those 

committees is shared directly with the stakeholders. 

18 

Senator TESTER. I got you. 

Mr. MCRAITH. We also do that in the United States; we host sessions for stakeholders here with the States and—— 

Senator TESTER. I understand, but it appears to me that the real 

work—the formalized work will be done in a public session. The 

real work is done in the technical sessions. Am I wrong on that? 

Mr. MCRAITH. Well, I disagree in this sense, Senator, respectfully: The real work is the engagement and the opportunities for 

engagement, so the development of the idea is then shared publicly, and the stakeholders are given opportunities not just through 

formal written mechanisms, but to provide direct feedback on the 

subject. 

Senator TESTER. OK. So were these technical meetings that the 

folks were paying to play at? Were those technical meetings that 

they were asked not to come back? 

Mr. MCRAITH. They were significantly less technical than the 

meetings now. In fact, this year, they are able to—they are authorized to provide much more technical input much earlier in the process. 

Senator TESTER. Not unlike everybody that is on this—I mean, 

I have been on boards my whole life, and I know that there is— 

we make rules, and we develop policy, and we develop regulation. 

And it is my opinion in this democracy it ought to be open. And 

I do not think there is anything to be afraid of when you are sitting 

down with these technical meetings, to sit down and let them listen. There is nothing wrong with that. If there is something wrong 

with that, you have got to tell me. And let them in on it, because, 

quite frankly, once it gets to a public situation from my perspective—and I have never been to one of these meetings, technical or 

otherwise—it has already been greased, it is already going. 

Mr. McCarty, would you like to respond to that at all? 

Mr. MCCARTY. Yes, I would like to intervene. Ten years ago, Al 

Iuppa, who was the president of the NAIC and also the executive 

chair of the IAIS, pushed very hard to make the IAIS look more 

like the NAIC. 

Senator TESTER. Right. 

Mr. MCCARTY. The working groups and the working parties are 

where the decisions and discussions were ultimately made, and 

where the documents were first being formulated. It gave an opportunity for the insurance industry to say, wait a minute, that may 

work for a business practice in Europe, but our business structure 

in the United States is very different, and then they went off for 

help in developing that. So I think it actually improved the product. 

Senator TESTER. I agree with you. And not only the industry but 

advocates, consumers, the works, right? 

Mr. MCCARTY. Right. And we funded consumers last year to start 

attending these. 

Senator TESTER. Yes. Look, I agree with the pay-to-play stuff. I 

do not think it should be—but I am telling you, transparency in 

Government is a good thing across the board. And the more people 

you can have—it makes it a pain in the neck, but the more people 

you can have giving their input, the better off we are. Thank you 

very much. 

19 

Thank you, Mr. Chair. 

Chairman SHELBY. Senator Heller. 

Senator HELLER. Mr. Chairman, thank you, and it is a pleasure 

to follow up after my friend from Montana. And a piece of legislation that we put together, I would like to just run down just a little 

bit, Mr. Chairman, what this legislation does, because in the vein 

of what he was saying—and I think I want to continue my questions down that path of the importance of accountability, transparency, and collaboration. I think that is incredibly important as 

we move forward. 

And I certainly hope, Mr. Chairman, that you will take a good 

look at this because I think it is an important piece of legislation. 

I am not sure that I am comfortable with the Treasury’s answers 

coming from the good Senator from Montana, but we will certainly 

try to get there. What we are trying to do in this effort is to make 

sure that the Federal Reserve and the Treasury provide Congress 

with an annual report and testimony on their activities with these 

forums, especially the International Insurance Forum. 

There was a good article today in the Wall Street Journal that 

discussed what we introduced yesterday, and I certainly believe 

that Senator Tester and I are moving in the right direction. What 

we really want for our bill is to ensure that the Federal Reserve 

and the Treasury study and report to U.S. consumers and the market before—before—they enter into any international capital standards. 

So let me try the Federal Reserve a little bit. Mr. Van Der 

Weide, shortly after the Federal Reserve joined the International 

Association of Insurance Supervisors, the IAIS voted to shut out 

the public observers, including consumer groups, from most of the 

meetings. Can you tell us how our representative voted on this 

issue? 

Mr. VAN DER WEIDE. The Federal Reserve has been supportive 

of the IAIS structural reforms. Similar to the FIO, we felt like that 

those were good global regulatory policy moves. It is important, 

though, as the IAIS removes the paid observer status and attains 

funding that is not coming from the industry, that they keep as 

much of the transparency benefits of the old program as they can. 

They are doing what they can. They are holding multiple stakeholder meetings quite frequently on their developing capital rules 

and supervisory framework. They plan to continue to do that in formal, fully public meeting environments. This is more public transparency than there was before on those meetings. 

So we are generally supportive of this IAIS move. I think it is 

incumbent on us as well, as U.S. members of IAIS, to enhance that 

global transparency and to provide as much U.S. stakeholder transparency as possible, and we have been doing that over the last 6 

to 9 months. We plan to continue to do that going forward. 

Senator HELLER. Let me make sure I understand you answer. So 

when the IAIS voted to shut out the public, our representative 

voted with the majority on that. 

Mr. VAN DER WEIDE. The Federal Reserve does not have a member on the executive committee, the highest decision-making level 

body of the IAIS, so I cannot say that we—— 

20 

Senator HELLER. How about the Treasury Department? Did you 

have a representative on that? 

Mr. MCRAITH. That is correct, Senator. 

Senator HELLER. How did they vote? 

Mr. MCRAITH. We voted in support of the enhanced transparency 

that resulted from the structural changes. This year, for the first 

time we have required public sessions for all of the IAIS work 

streams. Last year, as I mentioned, there were just over 10 to 12 

hours of those sessions. This year already we have about 50 to 60 

hours and counting. So we are pleased with the level of engagement. It is much more substantive, technical, and the opportunities 

for engagement are much greater than ever before. 

Senator HELLER. Mr. McCarty, do you have any comments? 

Mr. MCCARTY. Well, you know, I agree with my colleagues that 

we needed to amend the process as it was, that we needed to 

amend the pay-to-play. But there were many other less intrusive 

ways of doing it than just closing it out completely to observers and 

consumers. I voted against that change; so did all of my colleagues 

from the NAIC. I sincerely believe that both the Federal Reserve 

and FIO are really looking for better ways to include stakeholders, 

but I was at the first stakeholders meeting, and I do not think it 

was going in the right direction in terms of the interaction that 

was necessary to provide the kind of feedback that the insurance 

industry needs in order for them to be a meaningful partner in the 

development of the standards. And hopefully going forward our colleagues can work together to find ways to improve that system. 

Senator HELLER. Mr. Chairman, I am grateful that we have our 

witnesses with us today and their expertise. I just want to reemphasize the importance of this piece of legislation. We are talking 

accountability, transparency, and collaboration. I want to see that 

done. That is why Senator Tester and I are working together on 

this. So thank you. 

Chairman SHELBY. Thank you. 

Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. And thank you to the 

panel for taking the time to be here with us today and talk about 

a very important issue from my perspective. I spent several years 

in my career in the insurance industry and am thankful that I had 

that opportunity and think that the uniqueness of the insurance industry is easily differentiated from the opportunities and uniqueness in the industries like banking. So the capital standards are 

very important how we get there. We should have a serious, long 

conversation about those capital standards as we move from in 

making sure that we have the delineation between the insurance 

industry and the banking industry as it relates to those capital 

standards. 

My question, Mr. Woodall, is really about the FSOC and the SIFI 

designation process. FSOC is Dodd-Frank’s super-regulator and 

consists of 15 financial regulators, each with vastly different jurisdictions and backgrounds. While there may be some value derived 

from getting this group together from time to time, I have real concerns with the designation voting process. 

For example, the Director of the Federal Housing Finance Agency, which is the conservator for the GSEs, and the Chair of the NaVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
21 

tional Credit Union Administration each have as much say on 

whether an insurance company gets designated as a SIFI as you 

do, the Independent Member with Insurance Expertise. 

Now, Director Watt and Chairman Matz are honorable and 

smart people, but I do think that you have a much better barometer of an insurance company’s systemic risk than they do, and 

that matters. Let us take, for example, the case of Prudential. The 

FSOC voted to designate Prudential. You voted in your dissent, 

however, that ‘‘the FSOC’s analysis of systemic risk makes it impossible for me to concur because the grounds for the final determination are simply not reasonable or defensible and provide no 

basis for me to concur in the vote for designation.’’ 

Can you please elaborate on your dissent and more generally on 

what systemic risk would look like in the insurance industry if it 

were to exist? Based on your experience with the Prudential and 

MetLife voting process, do you think the FSOC designation process 

should be reformed to give a greater say to members with a background in the company whose designation is at issue? 

Mr. WOODALL. Well, Dodd-Frank actually gives two statutory determination standards in determining a SIFI, and one is that material financial distress could be a threat to the financial stability of 

the United States. That was the one that was used. 

The second one is that the activities of the company or the mix 

of activities could amount to be a threat to the financial stability. 

My position was that by taking just a scenario and projecting it 

to say that if they are in trouble it is going to be a threat, I would 

like to know what the activities are that people feel is a threat, and 

then that way the regulators know what the fix, the Fed knows 

what to fix when they get them, and then there is an exit ramp 

to get out if they do correct them, because what are trying to do 

is remove any systemic footprint that any of these companies leave. 

That was the basis of my dissent, and in both the dissents that I 

had, the State regulator nonvoting member also filed a comment, 

and then the FHFA, as you mentioned, also dissented in the Prudential matter. 

Senator SCOTT. Thank you. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. I am glad we are 

here today to talk about insurance and insurance regulation, because I have been looking at a problem that is costing American 

families about $17 billion a year, and it starts with loopholes in the 

laws that make it perfectly legal for brokers and advisers, including folks who sell insurance products, to take kickbacks for pushing 

lousy retirement products on unsuspecting families. 

Now, consider what happens with annuities. An annuity is an insurance product in which somebody invests today in order to get 

a steady payout when they hit retirement. The insurance industry 

is selling about $200 billion worth of annuities every year, and 

there may be some circumstances where buying an annuity makes 

sense. But as one observer noted, ‘‘It is not an accident that objective fee-only advisers hardly ever recommend annuities, while commissioned sales people seem to love them.’’ 

Now, I got interested in what kinds of kickbacks some of these 

insurance salesmen were getting when they pushed people to buy 

22 

annuities, and what I found is pretty amazing. I found free cruises, 

luxury vacations at five-star resorts, an African safari, private 

yacht tours of the Mediterranean, iPads, Mercedes Benz leases, 

and—get this one—a diamond-encrusted NFL Super Bowl style 

ring with a large ruby in the middle. 

Mr. Chairman, I would like to enter a few of these examples in 

the record, if I may. 

Chairman SHELBY. Without objection, it is so ordered. 

Senator WARREN. Thank you, Mr. Chairman. 

You know, that is a lot of money going to agent kickbacks instead of returns to customers who are just trying to provide for 

their retirement. 

Now, Mr. McCarty, you have been Florida’s insurance commissioner for over a decade, and in that role you have been a real leader in protecting vulnerable seniors from some of the insurance industry’s most abusive practices around annuities. Since you are 

here today, could you describe some of the practices that you have 

found in this market? 

Mr. MCCARTY. Yes. I share your deep concern for the vulnerability of our consumers, particularly as it relates to sales of annuities, where there is a lot of opportunities for misleading our elder 

seniors into buying products that are not suitable for them, and we 

use the term ‘‘churning and twisting,’’ where you would move them 

from one product to another product so you could get the new commission and potential bonuses that you have already articulated. 

We have taken a very aggressive role in Florida. We have specific 

laws not only in the insurance code but in the general code against 

any type of profiteering off of our seniors. We have passed extensive laws that require the salesmen to explain the different products that they are selling and how a difference in the product they 

have and why it would be superior. 

We also have a rescission provision, a 14-day lookback period, 

but I have also been empowered by the Florida Legislature to rescind those contracts and return all the premium to the consumers 

if we find out that was something inappropriate to be done to that 

consumer. 

We also looked at a lot of things in terms of we are one of the 

few States that look at sales materials to make sure they are not 

misrepresenting to our seniors. 

So we have an aggressive policy of protecting consumers in Florida, and we are continuing to look at other States for best practices 

and would certainly welcome opportunities to do what we can. We 

want to make sure that there is a flow of benefits. We do not want 

to stop the opportunity of consumers, because there are legitimate 

products. But at the same time, we need to be vigilant in protecting 

our consumers, and I am proud that we do that in Florida. 

Senator WARREN. Well, I want to thank you very much for your 

work. As you point out, you are one of the few States that is that 

aggressively involved. 

You know, most Americans have no idea that the people they go 

to for retirement advice could get such outrageous giveaways for 

pushing these products. I believe that the solution here starts with 

transparency. That is why today I launched an investigation, sending letters to the 15 largest annuities companies, describing the 

23 

kickbacks that I found, and asking them to disclose complete information on the perks, the rewards, the incentives, or whatever else 

they call the inducements they offer to sell these annuities to families and small investors who are trying to plan for their retirements. 

I believe that transparency is a powerful first step, but it is not 

enough. We all know that investing has risks and nobody is entitled to a guaranteed result. But there should be some basic rules 

of the road to make sure that investment advisers cannot get rich 

on kickbacks and that giveaways like these cause unsuspecting 

customers to lose out. 

The Department of Labor is working right now to set up those 

rules. I believe they should act forcefully and quickly, and we 

should help them in any way we can. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you, Senator. 

Senator Kirk. 

Senator KIRK. Mr. Van Der Weide, I had a question about—as 

you know, the insurance industry is a pretty large employer in my 

State, and in your implementation of the Collins fix, I would like 

to know how the process is going to establish a different capital 

standard for the insurance industry. 

Mr. VAN DER WEIDE. The process is going well, I think. We are 

in the information collection and analysis phase, so we are engaging heavily with a variety of insurance stakeholders in the United 

States, including individual insurance firms, their trade associations, and also interacting with insurance supervisors—State insurance supervisors, and foreign supervisors as well—to get their 

views on the best way for us to go. 

This is going to be a very challenging task for us. The Collins 

amendment fix is very useful, and it will help us to get to an insurance-centric, insurance-tailored capital requirement. But the U.S. 

insurance industry is pretty intensely heterogeneous, and the 17 

firms that we supervise are also intensely heterogeneous. We need 

to devise a regulatory capital framework that works for life insurers, for property and casualty insurers, for mutuals, for 

nonmutuals, for systemically important financial institutions, and 

the smaller firms. 

We have a lot of work to do, but thanks to the amendment to 

the Dodd-Frank Act, I think we will be able to, at the end of the 

day, produce a capital requirement that works well for all the firms 

that we supervise. 

Senator KIRK. Let me follow up and ask you what would slow 

down or speed up your work. 

Mr. VAN DER WEIDE. I think the work is going pretty well as it 

is. We have had some pretty high quality and reasonably high 

quantity consultations with the insurance industry and various 

other groups. I think we are getting the information that we need. 

To the extent that we decide we need additional information, formally or informally, I think we can get that. At this point I think 

the process is pretty well in train. 

Senator KIRK. Mr. Chairman, I think we really need to get this 

right to make sure that we do not regulate the insurance companies like banks, which could put our insurance industry at a seriVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
24 

ous competitive disadvantage. I want to make sure that you have 

the expertise and ability and the time that you need to come up 

with a correct standard. 

Mr. VAN DER WEIDE. I think we do, and we could not agree with 

you more that insurance companies have a very different business 

mix and risk profile than banks, and a bank-inspired capital framework is not the appropriate one for these firms. So we have built 

some expertise. We are building more expertise, and we are in a 

pretty deep engagement process with external parties to make sure 

that we understand how the U.S. State-level insurance capital 

rules work and the pros and cons of the different options. 

Senator KIRK. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Thank you. 

I have one question, Mr. Van Der Weide. Many insurers, as you 

well know, hold assets to match long-term liabilities. They argue 

that measuring the day-to-day fluctuations in those assets through 

a capital regime would create harmful volatility and inaccurately 

measure solvency. 

Do you agree with this assessment? 

Mr. VAN DER WEIDE. Yes, insurers are quite different from 

banks in some material ways, and one of them is in the nature of 

the assets and liabilities mix that they have and the potential mismatch between their assets and liabilities. Most insurance firms, 

particularly life insurance firms, have longer-term liabilities and 

longer-term assets, and that needs to be reflected in any capital 

framework or supervisory framework that we develop or any insurance regulator develops. So that is a key issue that we need to keep 

in mind as we move forward. 

Chairman SHELBY. Sir, how will the Federal Reserve ensure that 

the capital regime developed for insurers matches the held-to-maturity practice of insurers? 

Mr. VAN DER WEIDE. I think we will do that. 

Chairman SHELBY. OK. 

Mr. VAN DER WEIDE. This is an issue where there is some international disagreement. Different insurance regulators and supervisors around the world treat these assets differently. So this is an 

issue that is going to be front and center in our international debates. It has been in the construction of the insurance capital 

standard, the ICS. We are going to be very focused on that. ‘‘Team 

USA’’ will be very focused on that as we move forward, and we 

want to make sure that we have a capital regime that does work 

for the economics of the U.S. insurance model. 

Chairman SHELBY. Thank you. Gentlemen, we thank all of you 

for participating in the hearing. We have got some work to do, and 

we appreciate your information and your involvement. Thank you. 

[Whereupon, at 11:17 a.m., the hearing was adjourned.] 

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

25 

1First, Section 111(b)(1) of Dodd-Frank lists the voting members of the Council and includes 

‘‘(J) an independent member appointed by the President, by and with the advice and consent 

of the Senate, having insurance expertise.’’ Second, Section 111(c)(1) of Dodd-Frank sets the 

Independent Member’s term: ‘‘The independent member of the Council shall serve for a term 

of 6 years . . . .’’ And third, Section 111(i)(2) sets the level of the Independent Member’s compensation. 

PREPARED STATEMENT OF S. ROY WOODALL, JR. 

INDEPENDENT MEMBER WITH INSURANCE EXPERTISE, FINANCIAL STABILITY

OVERSIGHT COUNCIL

APRIL 28, 2015 

Thank you, Chairman Shelby, Ranking Member Brown, and Members of the Committee, for inviting me to appear before you today. This is my second appearance 

before the Committee and I truly appreciate the opportunity to share my thoughts 

with you on this important topic. 

After a career in the insurance sector and its regulation that began in 1961, I was 

asked in 2002 to assist the U.S. Department of the Treasury (Treasury) for 1 year 

with the implementation of the Terrorism Risk Insurance Act (TRIA), but ended up 

staying at Treasury for 8 years, during Republican and Democratic administrations, 

and serving under four different Treasury Secretaries. 

While at Treasury, my insurance portfolio was broad, but a recurring theme was 

insurance regulatory modernization. Proposals during that time included an Optional Federal Charter for insurers, as well as Federal insurance regulatory standards that would serve as a State regulatory floor. I also worked on legislative proposals that eventually led to the creation of the Federal Insurance Office (FIO) within Treasury, and was a principal contributor to the insurance sections in Treasury 

Secretary Paulson’s Blueprint for a Modernized Financial Regulatory Structure 

(2008) and Secretary Geithner’s Financial Regulatory Reform, a New Framework 

(2009). 

In addition, I was part of the team that led Treasury’s involvement in the legislative debate that culminated in passage of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (Dodd-Frank), with a particular focus on the provisions of 

the law relating to insurance. Ironically, of all of those insurance-related provisions 

in Dodd-Frank, the one that occupied the least amount of my time was the threeline section that created the position I now fill. 1 It was not until the House–Senate 

conference committee convened that the provision for an insurance member with a 

voting seat on the Council was added to the bill. Because insurance is functionally 

regulated by the States, the position was essentially intended to be a ‘‘proxy’’ in the 

absence of a Federal insurance regulator to counterbalance the other nine voting 

Council members. 

After my retirement from Treasury, I was nominated by the President to be the 

newly created Independent Member of the Council and was confirmed by the Senate 

in 2011. And today, I am the second longest-serving voting member on the FSOC. 

Having been involved in both its development and now its implementation, I 

think I bring a unique perspective on Dodd-Frank’s treatment of insurance, as I 

have an understanding of how insurance regulatory reform within Dodd-Frank was 

envisioned as working, where that reform has progressed as intended, where implementation has been effective, and areas in which it might be improved. 

In exercising its Dodd-Frank authorities, the Council has designated four companies as systemically important nonbank financial institutions, or ‘‘SIFIs,’’ after deciding that their material financial distress or failure could pose a threat to the stability of the U.S. financial system: American International Group (AIG), GE Capital 

Corporation (GE Capital), Prudential Financial Inc. (Prudential) and MetLife Inc. 

(MetLife). I was in the dissenting minority with respect to the designation of two 

of those companies—Prudential and MetLife, but joined the majority in designating 

the other two—AIG and GE Capital, as well as the Council’s decisions not to advance for further review five other nonbank financial companies. 

I am not here to debate any of the four SIFI designations. However, as noted in 

my dissents, I believe the Council’s focus should be on the activities of financial 

firms, the interconnections that may arise from such activities, and any potential 

heightened risks posed by those activities. In my opinion, the better approach would 

be for the Council to examine whether particular activities present systemic risk, 

and if so, consider the Council’s other options available under Dodd-Frank: (1) make 

recommendations to regulators or to Congress aimed at those activities; (2) designate the activities themselves as presenting systemic risk; and/or (3) designate 

companies that, in a concentrated manner, engage in such activities or mix of activities in a manner that could pose a threat to U.S. financial stability. If a companyVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00029 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
26 

specific SIFI designation does result, the Council, in my view, should specify the 

systemically risky or disfavored activities, or the combination of those activities, 

that caused the company to be considered a SIFI. This would provide some guidance 

as to what activities need to be addressed—not just so the SIFI can ‘‘exit’’ enhanced 

supervision, but, more importantly, so that, over time, the company can reduce its 

‘‘systemic footprint’’ and thus make the financial system safer and more resilient, 

which is, after all, our ultimate objective. 

Another issue raised in my dissents is my concern that international regulatory 

organizations may be attempting to exert what I consider to be inappropriate influence on the development of U.S. regulatory policy. I would like to elaborate on this 

concern today, as I remain wary of such influence on our U.S. domestic insurance 

regulation. 

Even though the three lines in Dodd-Frank creating the Independent Member position do not specifically charge it with a specific international role, all members of 

the Council have a duty under Dodd-Frank, ‘‘to monitor domestic and international 

financial regulatory proposals and developments, including insurance and accounting issues, and to advise Congress and make recommendations in such areas that 

will enhance the integrity, efficiency, competitiveness, and stability of the U.S. financial markets.’’ 

It is through exercising this general charge that I have become concerned over 

international developments and pressures. In the aftermath of the financial crisis, 

the Group of Twenty (G20) created the Financial Stability Board (FSB) with the aim 

of promoting global financial regulatory reform and harmonization. The FSB’s mandate is to: ‘‘promote international financial stability; . . . by coordinating national 

financial authorities and international standard-setting bodies as they work toward 

developing strong regulatory, supervisory and other financial sector policies . . . 

[and] foster a level playing field by encouraging coherent implementation of these 

policies across sectors and jurisdictions.’’ 

To that end, the FSB directed the Basel, Switzerland-based International Association of Insurance Supervisors (IAIS)—an international standard-setting organization 

composed of global insurance supervisors and supported by the Bank for International Settlements (BIS)—to develop recommendations to the FSB regarding 

international insurance capital and other standards. These IAIS recommendations 

are ultimately to be submitted to the FSB for its consideration and international 

agreement. If consented to, these international standards will be targeted at those 

U.S. insurers designated by the FSB as Global SIFIs, as well as those classified as 

Internationally Active Insurance Groups. 

Decisions made at the FSB, such as those that may soon include international insurance standards and policy measures, are made in private and by ‘‘consensus,’’ including the consent of the three U.S. Government agencies that are members of the 

FSB and act as ‘‘national authorities’’ for the U.S.—Treasury, the Board of Governors of the Federal Reserve System (Board of Governors), and the United States 

Securities and Exchange Commission (SEC). U.S. State insurance regulators are not 

represented at the FSB, nor are they party to any consensus agreements at the 

FSB. In my opinion, U.S. interests may be underrepresented at the FSB, not only 

regarding the insurance industry, but also as a function of the absence of other U.S. 

financial regulatory agencies. 

Additional international pressures are exerted through the International Monetary Fund and World Bank Financial Sector Assessment Program (FSAP), which 

issues public ‘‘report cards’’ on U.S. insurance regulators’ compliance with the IAIS 

International Core Standards (ICPs). The most recent FSAP report acknowledges 

that the U.S. is the largest insurance market in the world and has strong consumer 

protections. However, it found the U.S. lacking in rigid compliance with some of the 

ICPs, and endorsed more Federal government involvement in U.S. insurance regulation. 

While the Federal Government can enter into consensual international insurance 

agreements, it cannot commit to full implementation of these agreements or their 

underlying international standards, as insurance regulation is primarily the responsibility of the States. In the U.S., the decision as to whether, and how, to implement 

any FSB insurance-related international standards and policy measures resides 

with the States and their insurance regulators (as provided by Congress under the 

McCarran-Ferguson Act and reaffirmed in the Gramm-Leach-Bliley Act and DoddFrank). The Board of Governors was granted certain authorities by Dodd-Frank in 

addition to those held by the States with respect to a subset of insurance companies 

that are either part of a savings and loan holding company, or part of parent holding company that has been designated as a SIFI by the Council. Accordingly, it is 

critically important to look to the views of the State regulators and the Board of 

27 

Governors regarding implementation of any forthcoming international insurance 

agreements. 

It is also important to remember that international agreements and commitments 

made by the U.S. members of the FSB, including the adoption of IAIS measures, 

are commitments made under the auspices of the G20. As such, they carry considerable weight. Although it is true that they are not legally binding, such commitments 

are expected to be implemented as part of the G20’s global regulatory reform agenda. Indeed, the current Chairman of the FSB, Bank of England Governor Mark Carney, recently informed the G20 Finance Ministers and Central Bank Governors that 

‘‘full, consistent, and prompt implementation’’ of agreed reforms is essential to maintaining an open and resilient global financial system. 

If an internationally agreed-upon insurance agreement is not fully or uniformly 

implemented by the States, or not comparably implemented for both dually regulated (State and Federal) and State-regulated insurance companies, it could, at a 

minimum, reflect negatively on U.S. leadership internationally. Moreover, less than 

full implementation of such agreements in the U.S. could prompt foreign jurisdictions to subject U.S. insurers operating abroad to more stringent regulation, which, 

in turn, could affect U.S. competitiveness. We should be guided by what this situation could mean for U.S. insurance consumers and whether it would be in their best 

interest. 

The competitiveness of U.S. insurance companies abroad also raises international 

trade considerations. It is important that we also look to the views of another U.S. 

partner not represented here today—the Office of the United States Trade Representative (USTR) which resides within the Executive Office of the President. 

While some people may try to separate ‘‘prudential’’ (or regulatory) matters from 

‘‘trade’’ matters, in reality, they are closely joined and considered by many to overlap. 

Under Dodd-Frank, Treasury and the Board of Governors each has certain authorities that are limited to prudential matters involving insurance—with trade 

matters being expressly reserved to the USTR as provided under trade statutes. Although USTR is not a member of the FSB or the IAIS, it has an important role, 

as envisioned by Congress, especially since international agreements at the FSB 

may well affect market access, directly or indirectly. In this connection, I will note 

that the USTR and U.S. State insurance regulators have worked well together over 

many decades to open markets to U.S. insurers, and have done so in a very transparent manner as compared to many international processes. 

These international developments that I have briefly noted, help explain why 

many are raising what I consider to be legitimate concerns now, ahead of any international commitments being finalized, and why we should be cautious about ongoing 

initiatives by international bodies that could be used to influence policy decisions 

that Congress has either expressly delegated to the States, or that are the prerogative of the Congress itself. If U.S. Federal Government officials at the FSB are to 

commit, on behalf of the U.S. to implement international insurance standards in the 

U.S., then, given the regulatory structure endorsed by Congress, I believe that the 

outcome of any such commitment should be consistent with proven effective Statebased regulation and that any resulting agreement should contain express reservations preserving the discretion as to whether, or how, those standards will be implemented in the United States. 

While the negotiation of international insurance agreements may not grab headlines that capture the attention of everyday Americans, these agreements are nonetheless important to the lives of all Americans, given the potentially positive impacts and the risks of unintended negative effects on U.S. insurance consumers, as 

well as the consequential benefits and costs to the insurance industry and our financial system. 

As negotiations are ongoing, there is still time to ensure that any international 

agreements consented to by the FSB are reached through a more open process and 

are in the best interests of the United States. And, as is evident in the holding of 

this oversight hearing, Congress has an important role to play. 

Again, I appreciate the opportunity to appear before you today and am pleased 

to answer any questions you may have. I also stand ready to assist the Committee 

in any way I can as you continue the important work of monitoring international 

developments and improving our regulatory framework. 

28 

1 Board of Governors of the Federal Reserve System, Division of Banking Supervision and 

Regulation (2014), ‘‘Incorporation of Federal Reserve Policies into the Savings and Loan Holding 

Company Supervision Program’’, Supervision and Regulation Letter SR 14-9 (November 7), 

www.federalreserve.gov/bankinforeg/srletters/sr1409.htm. 

PREPARED STATEMENT OF MARK E. VAN DER WEIDE 

DEPUTY DIRECTOR, DIVISION OF BANKING SUPERVISION AND REGULATION, BOARD OF

GOVERNORS OF THE FEDERAL RESERVE

APRIL 28, 2015 

Chairman Shelby, Ranking Member Brown, and other Members of the Committee, 

thank you for inviting me to testify on behalf of the Federal Reserve. 

The Federal Reserve welcomes the opportunity to participate in today’s hearing, 

and I am pleased to be joined by my colleagues from the Federal Insurance Office 

(FIO) of the U.S. Treasury, the National Association of Insurance Commissioners 

(NAIC), and the independent insurance member of the Financial Stability Oversight 

Council (FSOC). While we each have our own unique authority and mission to carry 

out, we remain committed to working collaboratively on a wide range of international and domestic insurance supervisory and regulatory issues. 

The Federal Reserve’s Role in the Supervision of Certain Insurance Holding Companies 

With the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the Federal Reserve assumed expanded responsibility as the consolidated supervisor of a significant number of insurance holding 

companies. 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 for Federal Reserve supervision by the FSOC. The insurance holding companies for which the Federal Reserve is the consolidated supervisor hold approximately one-third of U.S. insurance industry assets and vary greatly in size and in the types of products they 

offer. 

After the 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 promptly assigned supervisory teams to 

handle day-to-day supervision of those insurance holding companies. We also acted 

promptly to commence supervision of the three insurance holding companies designated by the FSOC for Federal Reserve supervision. While building our supervisory regime for these firms, we have reached out to our colleagues in the State 

insurance departments. Our supervisory teams for insurance holding companies are 

a combination of experienced Federal Reserve staff as well as newly hired staff with 

insurance expertise. The Federal Reserve is investing significant time and effort 

into enhancing our understanding of the insurance industry and firms we supervise, 

and we are committed to tailoring our supervisory framework to the specific business lines, risk profiles, and systemic footprints of the insurance holding companies 

we oversee. Our supervisory efforts to date have focused on strengthening firms’ 

risk identification, measurement, and management; internal controls; and corporate 

governance. Our principal supervisory objectives for insurance holding companies 

are protecting the safety and soundness of the consolidated firms and their subsidiary depository institutions while mitigating any risks to financial stability. 1 We 

conduct our consolidated supervision efforts in a manner that is complementary to, 

and coordinated with, State insurance regulators, who continue their established 

oversight of insurance legal entities. We do not regulate the manner in which insurance is provided by these companies or the types of insurance that they provide. 

Those important aspects of the actual business of providing insurance are the province of the relevant State insurance supervisors. 

The Federal Reserve’s Development of Domestic Capital Standards for Insurance Holding Companies 

Congress recently enacted the Insurance Capital Standards Clarification Act of 

2014 (S. 2270), which amended the provision of the Dodd-Frank Act that had required the minimum capital standards for banks be applied to any insurance holding company that controls an insured depository institution or is designated for Federal Reserve supervision by the FSOC. With this amendment to the Dodd-Frank 

Act, the Federal Reserve may now focus on constructing a domestic regulatory capital framework for our supervised insurance holding companies that is well tailored 

to the business of insurance. To that end, the Federal Reserve has been engaging 

extensively with insurance supervisors and regulated entities to increase our underVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00032 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
29 

standing of the regulatory capital regime that already applies to insurance companies under State laws and to solicit feedback on various approaches to the development of an appropriate consolidated groupwide capital regime for insurance holding 

companies that would be consistent with Federal requirements. We are exercising 

great care as we approach this challenging mandate. We are committed to following 

formal rule-making processes to develop our insurance capital framework, which 

will allow for an open public comment period on a concrete proposal. We will continue to engage with interested parties as we move forward. 

The Federal Reserve’s Participation in the International Association of Insurance Supervisors (IAIS) 

Some of the insurance holding companies subject to Federal Reserve supervision 

are internationally active firms that compete with other global insurers to provide 

insurance products to businesses and consumers around the world. Our supervisory 

activities for these firms include collaborating with our regulatory counterparts 

internationally as well as domestically. As part of this role, in November 2013, the 

Federal Reserve joined our State insurance supervisory colleagues from the NAIC 

and the FIO as members of the International Association of Insurance Supervisors 

(IAIS). Accordingly, the Federal Reserve has been and will continue to be engaged 

in the development of global standards for regulating and supervising internationally active insurers. Global standard setting is not new to the Federal Reserve, as 

we have for decades participated in standard setting for global banks through our 

membership in the Basel Committee on Banking Supervision. As a general proposition, we believe in the utility of having effective global standards for regulation 

and supervision of internationally active financial firms. When implemented consistently across jurisdictions, such standards help provide a level playing field for global 

financial institutions. Further, consistent global financial regulatory standards can 

help limit regulatory arbitrage and jurisdiction shopping and can promote financial 

stability. We recognize, of course, that international regulatory standards cannot be 

imposed on U.S. firms by an international body; rather, these standards apply in 

the United States only if adopted by the appropriate U.S. regulators in accordance 

with applicable rulemaking procedures conducted here. 

Since joining the IAIS in late 2013, the Federal Reserve has been an active participant in several key committees, working groups, and work streams. We currently 

hold a seat on the Financial Stability Committee and the Technical Committee of 

the IAIS. Throughout our first year-and-a-half as a member of the organization, and 

consistent with our statutory mandate, the Federal Reserve has been particularly 

focused on the financial stability and consolidated supervision work of the IAIS. In 

these tasks, we have worked closely with our U.S. partners, including in particular 

the NAIC and its member supervisors. 

IAIS Strategic Priorities 

At the heart of the strategic priorities of the IAIS is the development of its Common Framework for the Supervision of Internationally Active Insurance Groups 

(ComFrame). Among other things, ComFrame includes the development of a global 

consolidated capital standard for large, complex international insurance companies. 

A group capital requirement for insurers with significant international operations 

is a new concept for U.S. insurance companies. State law includes capital requirements for insurance legal entities but does not include a groupwide or consolidated 

capital requirement for insurance groups. For the largest and most active global insurers, the Federal Reserve supports groupwide consolidated capital standards that 

are well tailored to insurance risks. We also strongly believe such standards must 

be deliberately developed through transparent processes and must be properly calibrated. 

A second key focus of the IAIS involves the identification of global systemically 

important insurers (G–SIIs) and the design of an enhanced regulatory and supervisory framework for G–SIIs. In 2013, the Financial Stability Board, in consultation 

with the IAIS and using a methodology developed by the IAIS, designated a set of 

nine global insurance firms (including three U.S.-based insurers) as G–SIIs. In addition to developing enhanced supervision standards and resolution planning requirements for G–SIIs, the IAIS continues to refine its G–SII designation methodology 

and to work diligently to design loss absorbency requirements for G–SIIs. 

Last year, the IAIS released the Basic Capital Requirement (BCR) for G–SIIs. It 

is the first international consolidated capital standard developed for the insurance 

industry. The IAIS developed the BCR to help provide a level playing field for the 

capital adequacy of global insurance firms with the largest systemic footprints. The 

IAIS intends to supplement the BCR with a Higher Loss Absorbency (HLA) capital 

30 

standard for G–SIIs. The IAIS expects to release a consultation draft on HLA in 

June with an accompanying request for public comment. 

In time, the IAIS expects that the BCR will be replaced by the more detailed and 

comprehensive Insurance Capital Standard (ICS), which is currently under development. Although the ICS likely will apply to a broader range of internationally active 

insurance groups, the IAIS expects that the ICS ultimately will also serve as the 

basis upon which HLA capital requirements for G–Slls are applied by the relevant 

national jurisdictions. IAIS began work on the ICS in 2013, issued an initial consultative proposal on the ICS late last year, and will continue work on the ICS for 

at least the next few years. This work includes the active participation of many volunteer insurance companies, including U.S. insurance companies, through field testing of various approaches and options, as well as the participation of State insurance supervisors and others. 

It is important to note that any standards adopted by the IAIS are not binding 

on the Federal Reserve, the FIO, State insurance regulators, or any U.S. insurance 

company. During the development of global standards for insurance firms by the 

IAIS, the Federal Reserve will work to ensure that the standards do not conflict 

with U.S. law and are appropriate for U.S. insurance markets and U.S. insurers. 

Moreover, the Federal Reserve would only adopt IAIS regulatory standards after following the well-established rulemaking protocols under U.S. law, which include a 

transparent process for proposal issuance, solicitation of public comments, and rule 

finalization. 

Cooperation and Coordination Among U.S. Supervisors, Regulators, and 

the Industry 

The Federal Reserve, along with the FIO and the NAIC, continues to actively engage with U.S. insurance companies on the development of global regulatory standards for insurance firms. For instance, the Federal Reserve, the FIO, and the NAIC 

have hosted four separate meetings with U.S. participants on the BCR and ICS 

since August of last year. These meetings were distinct and independent of two 

international sessions hosted by the IAIS. Moreover, in the coming months, the Federal Reserve, the FIO, and the NAIC are planning additional sessions with U.S. insurance firms, consumer groups, trade associations, and other interested parties. 

The Federal Reserve is committed to continuing this active level of dialogue and engagement and to continuing our work with the FIO and State and international insurance regulators to develop a set of standards for global insurance firms that is 

consistent across countries and appropriate for internationally active U.S. insurers. 

Nothing in the IAIS work plan, including the group capital requirement, seeks to 

lessen the critical role of individual insurance legal entity supervision conducted by 

the U.S. States and foreign countries. Rather, groupwide consolidated supervision 

and consolidated capital requirements supplement this legal-entity approach with a 

perspective that considers the risks across the entire firm, including risks that emanate from non-insurance subsidiaries and entities within the group. The Federal Reserve is a consolidated holding company supervisor that focuses on identifying and 

evaluating risks, capital and liquidity adequacy, governance, and controls across its 

supervised organizations. U.S. insurers with a global footprint or global aspirations 

stand to benefit considerably from a level global regulatory framework that is strong 

but pragmatic. Reasonably consistent global insurance standards for internationally 

active insurers and international cooperation among global regulators provide the 

means to that end. 

The Federal Reserve has acted on the international insurance stage in an engaged 

partnership with our colleagues from the FIO, the State insurance commissioners, 

and the NAIC. Our multiparty dialogue, while respectful of each of our individual 

authorities, strives to develop a central ‘‘Team USA’’ position on the most critical 

matters of global insurance regulatory policy. 

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

dialogue on these issues with you and other Members of the Committee. 

PREPARED STATEMENT OF MICHAEL MCRAITH 

DIRECTOR, FEDERAL INSURANCE OFFICE, DEPARTMENT OF THE TREASURY

APRIL 28, 2015 

Chairman Shelby, Ranking Member Brown, Members of the Committee, thank 

you for inviting me to testify today on the state of the insurance industry and insurance regulation. 

The Federal Insurance Office (FIO) publishes an annual report to address the 

state of the insurance industry and related regulatory or macroeconomic developVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00034 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
31 

1FIO’s 2014 Annual Report can be found at http://www.treasury.gov/initiatives/fio/reportsand-notices/Documents/2014lAnnuallReport.pdf. 

ments. FIO’s 2014 Annual Report included sections describing (1) a financial overview of the U.S. insurance industry, (2) developments and issues with respect to 

consumer protection and access to insurance, (3) regulatory developments, and (4) 

international developments. 1

Among the highlights, the 2014 Annual Report analyzed data demonstrating that, 

in the aggregate, insurers operating in the United States continue to show resilience 

in the aftermath of the financial crisis, including record levels of capital and surplus. At year-end 2013, the life and health sector (L/H) reported $335 billion in capital and surplus, and the property and casualty sector (P/C) reported approximately 

$665 billion in capital and surplus. 

Aggregate net written premiums in the L/H sector declined slightly from the 

record level set in 2012, largely as a result of lower annuity sales, whereas P/C sector net written premiums grew modestly in 2013. 

2013 bottom line numbers were encouraging. Record net income levels were 

achieved in 2013 for both the L/H and P/C sectors. The protracted low interest rate 

environment, however, has been a drag on net income, particularly for life insurers. 

To partially mitigate declining investment yields, insurers, as a sector, have marginally increased asset allocations toward lower rated and less liquid assets with longer 

durations, indicating increased portfolio risks. The L/H sector benefited from the 

performance of separate accounts, and recorded net income of $44 billion for 2013, 

as compared to the previous record high of $37 billion set in 2006. Lower catastrophe losses and favorable loss development contributed to higher net income for 

the P/C sector, which reached a record $72 billion; the previous high net income was 

$66 billion, also set in 2006. 

Per capita premium expenditures are a measure of private insurance density, or 

prevalence, throughout a national economy. On a per capita basis, from 2009–2014 

insurance premiums for the combined L/H and P/C sectors have increased in the 

United States at an average rate of 1.6 percent, better than developed economies 

in Western Europe but less than growth rates in fast-developing Asian economies. 

For example, while France’s per capita premium expenditure declined by 3.7 percent 

from 2009–2014, China’s increased by 13.6 percent. 

Aggregate premiums as a percentage of Gross Domestic Product (GDP) are a 

measure of private insurance penetration in a national economy. In 2005, aggregate 

L/H and P/C premiums amounted to 8.91 percent of U.S. GDP, and in 2013 total 

premiums amounted to 7.51 percent of gross domestic product, a decline of 15.7 percent. This indicates that the aggregate growth of U.S. premium volume did not 

maintain the pace of growth in GDP. In that same period, developing economies saw 

an increase in private insurance premium volume as a percentage of GDP, an indication that developing economies are pursing private capital to support retirement 

security and the protection of personal and commercial assets. 

To be sure, the U.S. insurance sector, including those firms that are internationally active, has an important role in the national economy. Indeed, in the United 

States, insurance is both local and global. Insurers compete in markets throughout 

the country, underwrite risk on a local and personal basis, and consumers have the 

benefit of local support from State regulators. 

The insurance sector, both nationally and globally, is evolving dramatically, and 

we appreciate the opportunity to reflect with you upon where the sector is now and 

where it is going. 

Recent Federal developments are one aspect of change within the U.S. insurance 

sector. In January, Congress passed and President Obama signed the Terrorism 

Risk Insurance Program Reauthorization Act of 2015 (Reauthorization Act). The Reauthorization Act both renewed and reformed the Terrorism Risk Insurance Program (TRIP), and, in Title II, reestablished the National Association of Registered 

Agents and Brokers (NARAB). With respect to TRIP, the program includes sensible 

reforms that further reduce taxpayer exposure, increase private sector contributions, 

and support national security and continued economic growth. When fully operational, NARAB will serve as a solution to the long-standing multistate licensing 

and administrative burden confronted by many insurance agents and brokers. 

Much attention has been devoted to developments in international standard-setting in the insurance sector. International insurance standard-setting activities are 

not new. In fact, the National Association of Insurance Commissioners (NAIC) was 

among the founding members of the International Association of Insurance Supervisors (IAIS) in 1994. Since that time, U.S. State insurance regulators have worked 

to set and meet international standards. Each of the 56 independent members of 

the NAIC (50 States, the District of Columbia, and five territories) is also a member 

32 

of the IAIS, and State regulators have more votes in the IAIS plenary session (15) 

than any other jurisdiction. 

More recently, since it became a full member in 2012, and consistent with its statutory role, FIO has represented the United States on prudential aspects of international insurance matters, including representing the United States at the IAIS. 

In October 2014, the Board of Governors of the Federal Reserve System (Federal 

Reserve) became a full member of the IAIS. With the combined participation of 

State insurance regulators, the Federal Reserve and FIO, all aspects of the unique 

U.S. insurance oversight system are actively engaged at the IAIS. 

When dealing with the IAIS standard-setting work, FIO, the Federal Reserve and 

State insurance regulators work together extensively and regularly coordinate. As 

the U.S. participants of IAIS, the leadership and staff of all three groups are in close 

and meaningful engagement through frequent calls and meetings. Our collaboration 

is a testament to the shared objectives of the agencies involved. 

Any discussion of the U.S. insurance sector and its regulation must begin with 

the recognition that the United States has the most diverse and competitive insurance market in the world. Thousands of insurers operate in the United States, ranging from small mutual companies operating in a few rural counties to massive global firms engaged in a variety of financial activities. As the Illinois Director of Insurance, I learned firsthand about the importance of small and midsize insurers to the 

marketplace and to local and regional economies. Consolidation pressures in the 

small insurer market segment have existed for years, but we recognize and want 

to preserve the important contributions of local and regional insurers to consumers 

and communities. 

Supporting much of this local and global activity is the global reinsurance industry—a market with many important participants based outside the United States. 

In fact, based on gross premiums ceded, more than 90 percent of the unaffiliated 

reinsurance of U.S. property and casualty insurers is placed with a non-U.S. reinsurer or a U.S. reinsurer with a non-U.S. holding company parent. 

In recognition of both the U.S. market and the U.S. system of insurance supervision, FIO’s international work is guided by three priorities: (1) to promote and enhance a competitive U.S. insurance market through effective, efficient supervision; 

(2) to establish prudentially sound, equal-footing for U.S.-based insurers to operate 

successfully around the world; and (3) to safeguard financial stability. 

At the same time that we support diverse and competitive U.S. insurance markets, FIO strongly supports continued growth of the increasingly international insurance market and the prudential standards that promote consistent and rigorous 

oversight across jurisdictions. 

In the last 10 years, the pace of globalization in insurance markets has increased 

exponentially and is expected to continue to grow in the coming years. Insurers 

based in the United States are pursuing opportunities for organic growth in new 

markets. Aon Benfield’s 2014 Country Opportunity Index, which identifies the 

world’s most promising P/C markets, listed five Asian markets among its top ten, 

in addition to three from Africa and two from South America. Even a cursory review 

of the demographics in Brazil, China, India, Indonesia, and South Korea demonstrates this point. 

In fact, U.S.-based insurers are extending operations around the world, and a 

growing number expect in the coming years to generate 40 percent or more of revenue from outside the United States. In addition, in 2014, well-known U.S. insurers 

that are subsidiaries of non-U.S. holding companies accounted for more than 13 percent of aggregate L/H and P/C premium volume. 

Private market premium volume growth shows that insurers are committed to 

international growth. Measuring global market share by aggregate premium volume, from 2008 to 2013, the United States’ share of the world market declined from 

29 percent to 27 percent despite an increase in real dollars of more than $32 billion. 

For the same period, China’s share increased in real dollars by more than $137 billion and as a percentage of the global market from 3 percent to 6 percent. As reported in FIO’s 2014 Annual Report, South Korea, Brazil, and South Africa experienced similar proportional increases. 

These numbers reiterate the message that developing markets present important 

growth opportunities for U.S.-based firms and that growth will continue at an increasing rate in the years to come. Growing economies around the world seek private sector solutions through life insurance products for retirement security and 

through property and casualty insurers for private asset accumulation and protection. 

Due to global economic growth, many jurisdictions—both developing and well-established markets—are modernizing insurance supervisory regimes. For example, in 

33 

North America, both Mexico and Canada have undertaken sweeping insurance regulatory reforms, just as have Australia, China, and South Africa. 

Global supervisors welcome the influx of private capital from insurers domiciled 

in the United States, and elsewhere, and are increasingly desirous of a common language and common standards by which to understand how a globally active insurer 

manages risk. These supervisors want to know how consumers subject to that supervisor’s protection fit into the insurer’s broader risk management approach. This is 

fundamentally a question of consumer protection: how are consumers around the 

world protected when insurers operate globally? 

As the insurance sector evolves globally, the United States will continue to contribute constructively in support of international standards that, when implemented, will benefit U.S. consumers, U.S. insurers and global financial stability. 

Working together, U.S. participants of the IAIS are already leading developments 

in international standard-setting activities. Absent the participation and leadership 

of U.S. participants, international standard-setting activities would continue without reflecting the unique features of the U.S. market and regulatory structure. 

IAIS Capital Standard Development 

International coordination can be difficult even under the best of circumstances. 

However, through the IAIS, our engagement, communication and coordination with 

other countries has been collaborative and productive. This is not to say that we 

agree with every IAIS member on all substantive, technical or procedural issues. Insurance supervisors from around the world come together through the IAIS to learn, 

to analyze, to develop and to understand best practices for insurance supervision. 

Each country or region brings its unique perspective and predisposition to the conversation, and all have the opportunity to learn. The challenge is to find a path to 

consensus, around practical and achievable objectives. 

The development of capital standards at the IAIS dates back to at least 2009, 

with the commencement of a common framework for the supervision of internationally active insurance groups, or ComFrame. More broadly, and in response to the 

global financial crisis, G20 Leaders at recent Summits asked the Financial Stability 

Board (FSB) to develop a policy framework to address the systemic and moral hazard risks associated with systemically important financial institutions. In response, 

the FSB, which coordinates G20 financial regulatory initiatives, developed a framework and called on the relevant international standard-setting bodies to, among 

other things, develop methodologies for identifying globally systemically important 

financial institutions (G–SIFIs) in each financial services industry. 

In July 2013, the FSB called upon the IAIS to develop a backstop capital requirement (now known as Basic Capital Requirement, or BCR) by 2014 for globally systemically important insurers (G–SIIs) and to develop in 2015 an approach to higher 

loss absorbency (HLA) for G–SIIs in 2015. These policy measures conform with the 

G20 endorsed FSB framework for systemically important financial institutions, 

which calls for higher loss absorbency for all G–SIFIs. The FSB called upon the 

IAIS to continue development of ComFrame, and to include in ComFrame a quantitative insurance capital standard. This comprehensive work plan and the related 

deliverables (including ComFrame, BCR and HLA) have been welcomed by G20 

Leaders. 

At its 2014 Annual Meeting in October, after more than 12 months of data analysis, testing and consultation, the IAIS adopted an approach to the BCR. The BCR 

is the first global group capital standard for the insurance sector and provides a 

simplistic method to measure capital within an insurance group across jurisdictions. 

The BCR will serve as the starting point for both the HLA and the insurance capital 

standard (ICS), the latter of which will likely supersede the BCR as the future basis 

for HLA for G–SIIs. 

Development of HLA for the insurance sector presents a significant technical challenge. Insurers, the products sold by insurers, and existing jurisdictional capital requirements, vary greatly around the world. Following months of intense analysis 

and drafting, the IAIS consultation paper on HLA will be released in June for a period of 60 days. 

With respect to the ICS, the IAIS released a consultation paper in December and 

written comments were received from stakeholders for more than 60 days. The consultation paper was highly technical, and generated 1,500 pages of comments from 

stakeholders. 

As publicly described in March 2015, IAIS members agreed on the ‘‘ultimate goal’’ 

of the ICS which provides a focal point, a guiding light, for the technical work that 

is underway. IAIS members agreed: 

The ultimate goal of a single ICS will include a common methodology by 

which on ICS achieves comparable, i.e., substantially the same, outcomes 

34 

2The ultimate goal of the ICS can be found in the IAIS’s March 2015 Newsletter and can 

be found at http://iaisweb.org/index.cfm?event=getPage&persistId=T347DFD3A5155D896 

B001B1CB99C644F78. 

across jurisdictions. Ongoing work is intended to lead to improved convergence over time on the key elements of the ICS toward the ultimate goal. 

Not prejudging the substance, the key elements include valuation, capital 

resources, and capital requirements. 2

As technical experts from the United States and around the world sort through 

the many complexities of the key elements, the ‘‘ultimate goal’’ provides the boundaries to shape and influence those conversations and the day-to-day developments. 

Given the enormous amount of technical work and the magnitude of the global 

differences, achieving this ‘‘ultimate goal’’ will not happen quickly. In the near term, 

building upon data, analysis and testing, progress will be made and convergence 

will improve. Importantly, work will proceed incrementally toward milestones that 

are realistic, achievable, and that are fact-driven and consensus-driven. 

IAIS Organizational Reform 

IAIS organizational reform has improved its financial independence, efficiency 

and transparency. Formerly, the IAIS charged stakeholders as much as $20,400 annually in order to receive the designation of ‘‘observer’’ and thereby receive access 

to certain meetings, social events, and information. Through 2014, the IAIS received 

approximately 40 percent of funding from observers—primarily industry—thereby 

creating the appearance of a quid pro quo arrangement that detracted from the 

credibility of IAIS members and stakeholders. Due to the IAIS organizational reform, the financial dependence upon industry no longer exists. 

At the same time, the IAIS has dramatically improved its engagement with and 

transparency to stakeholders. Perhaps most importantly, the IAIS no longer discriminates between stakeholders that pay the fee and those that do not. In addition, 

the following examples illustrate the improvements to the IAIS processes for stakeholder consultation: 

• In 2014, stakeholder sessions for all IAIS workstreams amounted to less than 

12 hours, but in 2015 IAIS stakeholder sessions for all IAIS already amount to 

more than 60 hours, with more sessions to be scheduled. 

• The IAIS Web site will contain information available to the public, not just to 

stakeholders who pay the annual fee. 

• With the launch of a consultation paper, the IAIS will host explanatory meetings and calls so that stakeholders can learn about substance and structure of 

the document in advance of providing comments. 

• After receiving comments on a consultation paper, the IAIS will publish the 

comments received, release a summary of comments, and offer a reply to the 

comments. 

• For the various work streams (e.g., capital, governance, or market conduct), 

stakeholder contact lists are being developed so that those stakeholders can provide input to a consultation paper prior to the paper’s release for comment. 

• Release of a monthly newsletter to describe developments in the preceding 

month and events scheduled for the coming month. 

While only a few IAIS workstreams were directly open to stakeholders before 

2015, the new governance and transparency practices provide a uniform approach 

to openness and stakeholder engagement for all IAIS activities. 

Finally, U.S. stakeholders have opportunities to meet and work with the U.S. participants. Working with State regulators and the Federal Reserve, FIO has coordinated opportunities for stakeholders, including industry and consumer advocates, to 

meet and present to all U.S. members of the IAIS at one time, thereby enabling the 

U.S. members to receive the views of a wide range of U.S. stakeholders in a U.S.- 

based forum. 

EU and U.S. Insurance Project 

The EU and the United States are both significant insurance markets. In terms 

of premium volume, despite the growing prominence of developing markets, the EU 

ranks first and the United States ranks second as consolidated markets. The EU 

and the United States are home to many of the world’s most prominent global insurers—large multinational insurance groups that are pushing more aggressively into 

new markets around the world. The EU is also modernizing its approach to insurVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
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3FIO’s report on How To Modernize and Improve the System of Insurance Regulation in the 

United States can be found at http://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/. The Project’s revised Way Forward can be found at http://www.treasury.gov/initiatives/fio/EU-US%20Insurance%20Project/Documents/The%20Way%20Forward%20(July%20 

2014%20Revision).pdf. 

ance regulation through Solvency II, a new EU-wide harmonized insurance regulatory regime. 

With these facts in mind, FIO convened the insurance leadership of both jurisdictions at Treasury in January 2012. At this initial meeting, participants included 

FIO, State regulators, the European Commission, the European Insurance and Occupational Pension Authority, and the United Kingdom’s Prudential Regulatory Authority. We call this the EU–U.S. Insurance Project (Project). State insurance regulators, including Commissioners Voss, McCarty and Consedine, among others, have 

made invaluable contributions to the effort. Going forward, we welcome the participation of the Federal Reserve in the Project. 

Thanks to the participants, the Project has been a demonstrably successful transatlantic collaboration. In September 2012, the Project released a report that identified similarities and differences between the regulatory approaches in the EU and 

United States, and, in December 2012, the Project released an initial Way Forward, 

which outlined common policy objectives and milestones through 2017. Following 

the EU’s adoption of Solvency II in late 2013, and the December 2013 release of 

FIO’s report entitled ‘‘How To Modernize and Improve the System of Insurance Regulation in the United States’’, continued modernization by State regulators, and developments at the IAIS, the Project released a revised Way Forward in August 2014 

which updated the common objectives and milestones. 3 Of course, as with all such 

international developments, implementation will occur in the United States only 

through Federal and State authorities. 

A central feature of the Project is work toward a potential covered agreement between the EU and the United States. A covered agreement is a unique statutory 

authority given to Treasury and the Office of the United States Trade Representative (USTR) to negotiate an agreement between the United States and one or more 

foreign jurisdictions that relates only to prudential insurance and reinsurance measures. 

The 2014 Way Forward reiterates Treasury’s support for USTR and FIO to pursue 

a covered agreement with respect to State-based reinsurance collateral requirements. The 2014 Way Forward also identifies both group supervision and confidentiality/professional secrecy as areas for which the possibility of a covered agreement 

should be explored. 

Recently, the EU nations gave the European Commission the negotiating mandate 

to pursue an agreement with the United States that will ‘‘greatly facilitate trade 

in reinsurance and related activities’’ and ‘‘will enable us . . . to recognize each other’s prudential rules and help supervisors exchange information.’’ 

Importantly, a covered agreement must provide tangible benefits for U.S. stakeholders. While the mechanics of a covered agreement process remain under development, and negotiations with the EU are not scheduled, FIO welcomes robust engagement with Congress, State regulators, and other stakeholders on the opportunity presented by a covered agreement. 

Conclusion 

Through effective collaboration at home and abroad, U.S. insurance authorities 

are positioned to provide U.S. leadership that complements the shared interest in 

a well-regulated insurance market that fosters competition, promotes financial stability, and protects consumers. 

Importantly, it bears repeating that, in all of our work, both internationally and 

domestically, our priorities will remain in the best interests of U.S. consumers, U.S. 

insurers, the U.S. economy, and jobs for the American people. 

We welcome the chance to work with this Committee and its excellent staff, and 

look forward to more discussions on these important topics. 

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

36 

PREPARED STATEMENT OF KEVIN M. MCCARTY 

COMMISSIONER, FLORIDA OFFICE OF INSURANCE REGULATION, ON BEHALF OF THE

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS

APRIL 28, 2015 

Introductory Remarks 

Chairman Shelby, Ranking Member Brown, and Members of the Committee, 

thank you for the opportunity to testify today. My name is Kevin McCarty, and I 

am the Insurance Commissioner for the State of Florida. I am also a past President 

of the National Association of Insurance Commissioners (NAIC) and serve as the 

Chair of the NAIC’s International Insurance Relations (G) Committee. I present this 

testimony on behalf of the NAIC. 

The NAIC is the United States standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 States, the 

District of Columbia, and five U.S. territories. Through the NAIC, we establish 

standards and best practices, conduct peer review, and coordinate our regulatory 

oversight. NAIC members, together with the central resources of the NAIC, form the 

national system of State-based insurance regulation in the U.S. 

Insurance is critical to the U.S. economy and plays an equally important role in 

global markets. The U.S. insurance market is the largest and most competitive in 

the world, with $1.8 trillion in premium volume and thousands of insurers writing 

policies. State insurance regulators supervise nearly a third of all global premium, 

and taken individually, U.S. States make up more than 24 of the world’s 50 largest 

insurance markets. My home State of Florida, for example, is the 12th largest insurance jurisdiction worldwide by premium volume. To help put that in perspective, the 

Florida market for insurance is about the same size as Canada’s market, about 50 

percent larger than Australia’s market, and nearly twice as large as Switzerland’s 

market for insurance. As U.S. State insurance regulators who cooperate closely on 

a regular basis, we have long been committed to providing leadership on a wide 

range of global insurance issues and activities, with a focus on ensuring policyholder 

protections and maintaining stable and competitive insurance markets. 

As discussions move forward regarding the development of domestic and global 

capital rules, State insurance regulators continue to oppose imposing a one-size-fitsall bank-centric set of regulations on insurers and instead focus on the importance 

of company and product specific analysis and examination. While insurer capital requirements are important, such requirements are not a substitute for the other tools 

in the regulatory tool box and, if imposed incorrectly, can be unnecessarily onerous 

to the company and ultimately harmful to the policyholder. We are concerned that 

taking a uniform regulatory approach that treats insurers more like banks may actually encourage new risk-taking in the insurance industry. The NAIC and its members remain extensively engaged with our Federal and international counterparts to 

ensure that our national State-based system has a prominent voice in the development and implementation of domestic and global capital standards and that they 

are adaptable to our markets and benefit our consumers. 

Distinguishing Characteristics of Insurance Products and U.S. Insurance 

Regulation 

The fundamental tenet of our U.S. system is to protect policyholders by ensuring 

the solvency of the insurer and its ability to pay insurance claims. Insurance companies are different from other financial institutions and from each other. There is a 

large amount of variability in insurance products. The insurance regulatory system 

is purposely flexible to address the depth and breadth of these differences. While 

insurance policies involve up-front payment in exchange for a legal promise to pay 

benefits upon a specified loss-triggering event in the future, banking products involve money deposited by customers and are commonly subject to withdrawal on demand. The very nature of insurance significantly reduces the potential of a run-onthe-bank scenario for property/casualty, health and most life insurance products. 

For those limited products sold by insurers that could be subject to some level of 

run risk, mitigating factors exist such as policy loan limitations, surrender/withdrawal penalties, and additional taxes. Additionally, insurers typically maintain a 

diverse product mix so only a portion of the company’s products would be subject 

to the already reduced level of run risk. 

Insurance products, unlike banking products, do not transform short term liabilities into longer term assets. Insurance has shorter duration liabilities in many of 

the property/casualty and health product lines, and the assets held are similarly 

short term. Insurance has longer duration liabilities in life and annuity product 

lines, and these liabilities are matched against similarly longer term assets. This 

37 

is a critical distinction from banking and other financial products. A key reason 

many other financial firms suffered during the financial crisis was that the duration 

of their assets and liabilities were not matched in a way that enabled them to fund 

their liabilities when they came due. 

It is important to design regulation that best recognizes and addresses the differences in products and the financial institutions that offer them while providing 

the appropriate level of protection for policyholders. State insurance regulators want 

to make certain that insurance policyholders’ assets are protected when an insurer 

operates within a large, diverse financial group. That is why State insurance regulators strongly support The Policyholder Protection Act (S. 798) to clarify our existing authority to wall off the insurance legal entity from contagion elsewhere in the 

group. It is critical that the regulatory walls around legal entity insurers that have 

protected policyholders for decades remain intact regardless of an insurer’s organizational structure or financial circumstance. 

Federal Reserve Capital Rules Should Be Appropriate for the Insurance 

Business Model 

Given the different business models and regulatory objectives between banking 

and insurance, State insurance regulators want to ensure that any new capital 

standards at home or abroad appreciate these distinctions. We are keenly aware of 

the many complicated considerations involved in setting capital standards appropriate for insurers, and are committed to assisting the Federal Reserve in its efforts 

to implement capital rules for savings and loan holding companies (SLHCs) and insurers that are designated systemically important financial institutions (SIFIs) by 

the Financial Stability Oversight Council. It is important to keep in mind that these 

standards are in addition to, and not in lieu of, State risk-based capital standards 

applicable to the insurers within those groups, so we would encourage the Federal 

Reserve to work closely with us to ensure their standards complement our existing 

regulatory authority. We supported the passage of the Insurance Capital Standards 

Clarification Act last year to give flexibility to the Federal Reserve to tailor its capital rules for these companies. We are hopeful that the Federal Reserve will utilize 

this flexibility to apply capital rules to these entities that are consistent with the 

insurance business model and our legal entity regulation and we are committed to 

assisting them in this important endeavor. We have had some constructive initial 

conversations with them and look forward to continued discussions in the future. 

Global Capital Standards for Insurers Should Be Compatible With the U.S. 

System 

In addition to the regulatory changes occurring domestically, it is important to 

note that changes are occurring internationally at the same time. The International 

Association of Insurance Supervisors (IAIS) is simultaneously developing capital 

proposals primarily to address systemically important firms, but also new requirements on internationally active groups that are not deemed too big to fail, including 

many firms based in the U.S. As part of the policy measures recommended for application to globally systemically important insurers (G–SIIs), the IAIS has moved rapidly, under specific direction and pressure from the Financial Stability Board (FSB), 

to develop international standards for a basic group capital requirement (BCR) and 

additional higher loss absorbency (HLA) capital measures (capital buffers) that 

would be imposed on firms that are deemed too big to fail. 

In addition, the IAIS is developing a global insurance capital standard (ICS) as 

part of a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame). State insurance regulators are concerned about the development of international capital standards for the insurance industry as well as the 

process and speed with which the IAIS has been developing them. We have serious 

concerns about the aggressive timeline of developing a global capital standard given 

legal, regulatory, and accounting differences around the globe, but are fully engaged 

in the process to ensure that any development appropriately reflects the risk characteristics of the underlying business and does not undermine legal entity capital requirements in the U.S. 

The NAIC’s objective is to ensure that the capital proposals developed at the IAIS 

are reasonable and compatible with our system. We must also ensure they don’t inadvertently lead to unintended consequences such as limiting insurance products or 

stagnating growth in the insurance sector, including jobs and innovation. If tailored 

for our regulatory system, there is value in understanding the capital adequacy of 

insurance groups, particularly when part of a larger conglomerate or affiliated with 

other entities. But that value only exists if it supplements and wraps around our 

existing legal entity standards. We also remain concerned with the more volatile 

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38 

ard because it represents a short-term focus rather than a longer-term view and 

could have a negative impact on the U.S. market to the detriment of American insurance consumers. In our view, taking a more homogenous regulatory approach that treats insurers 

more like banks may actually encourage new risk-taking in the insurance industry. 

Also, if the new standards are excessive or too inflexible, then they could increase 

costs on U.S. insurers and consumers and undermine the U.S. State-based insurance regulatory system, which is based on protecting policyholders and has a strong 

track record of effective solvency supervision and stable, competitive insurance markets. The IAIS must recognize that a system that has existing safeguards and controls to supervise the movement of capital within a group may take a different approach to capital adequacy at the group level than jurisdictions that do not have 

similar requirements. The IAIS objectives on capital standards are not easily achievable and will require a significant commitment of resources over many years to ensure that they are compatible with the U.S. system of insurance regulation as well 

as with other jurisdictions around the world. 

Of crucial importance to the international discussions will be the Federal Reserve’s implementation of capital rules. But let me be clear, while the Federal Reserve has its responsibilities, we have our own. Most of the Internationally Active 

Insurance Groups (IAIGs) that will potentially be subject to the ICS are not SLHCs 

or SIFIs that are also regulated by the Federal Reserve. To that end, while we are 

committed to collaborating with our Federal and foreign counterparts where we can, 

we still have a responsibility to the U.S. insurance sector. We will not implement 

any international standard that is inconsistent with our time-tested solvency regime 

that has provided long-standing protection to policyholders and ensured a competitive and stable U.S. insurance marketplace. 

Inclusive and Transparent Decision-Making Process Is Critical to Effective 

Regulation 

Critical to the credibility of decision making at the IAIS is an inclusive and transparent decision-making process. It is difficult to achieve optimum regulatory outcomes or reach broad consensus about international standards without the input of 

those most affected, in particular the consumer we protect and the industry we regulate. That is why State insurance regulators adamantly opposed efforts at the IAIS 

to limit stakeholder engagement. We continue to believe the IAIS’s decision represents a step back for the openness and transparency necessary to give IAIS work 

credibility and legitimacy, particularly if and when legislative bodies are expected 

to consider IAIS proposals. The IAIS has new stakeholder and consultation procedures in place and State regulators participating at the IAIS will assess the effectiveness of these new procedures and continue to advocate for increased transparency, and will urge other U.S. IAIS members to support this worthy goal. 

We remain equally concerned with the lack of transparency at the Financial Stability Board. While we appreciate the role of the Federal Reserve, Treasury, and the 

Securities and Exchange Commission as members of the FSB, State insurance regulators supervise 100 percent of the private insurance market in the United States 

and to date have had only limited access into FSB discussions directly relevant to 

our sector. This direct participation has only occurred as a representative of our 

international standard setting body, the IAIS, and not after requesting inclusion 

from our own U.S. FSB representatives. Particularly given the role of the FSB in 

designating three U.S. insurers as globally systemically important insurers, we find 

the lack of support for our inclusion at the FSB by our Federal colleagues troubling 

and not reflective of the best interests of U.S. insurers and policyholders. In light 

of the significant influence the FSB has on the IAIS, it is important that the entire 

‘‘Team USA’’ be involved in insurance related discussions at the FSB. 

For our part, the NAIC has long-standing procedures and ongoing responsibilities 

to seek input from policyholders and other interested parties, and we will continue 

working on these issues in a transparent manner through our NAIC process. To 

that end, last year, the NAIC formed the ComFrame Development and Analysis (G) 

Working Group (CDAWG), which I chair, to provide ongoing review, and technical 

as well as expedited strategic input on ComFrame and the international group capital developments. In addition, the CDAWG has been exploring group capital concepts that would be appropriate for U.S. based internationally active insurance 

groups. 

Most recently, the CDAWG helped review the first IAIS Consultation Draft on the 

ICS, which was issued in December 2014. State insurance regulators provided comprehensive feedback to the IAIS regarding the elements of the proposed ICS such 

as valuation and potential methods for determining capital requirements. The NAIC 

is currently working through its open and public process to update its position stateVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
39 

ments on ComFrame and international capital developments with input from consumer and industry stakeholders. These documents serve to articulate the views of 

U.S. State insurance regulators toward the uses of capital within prudential regulation and help guide our ongoing work regarding IAIS capital proposals. As we work 

to affirm and update our positions, we welcome these additional perspectives to further enhance the focus of our regulatory priorities. We expect to finalize these positions shortly and will share them with the Committee. 

Conclusion 

U.S. insurance regulators have a strong track record of effective collaboration and 

supervision, and the NAIC is committed to coordinating with our Federal and international counterparts to help ensure open, competitive, and stable markets around 

the world. It is critical that we promote a level playing field across the globe 

through strong regulatory systems while recognizing that there will continue to be 

different cultural, legal, and operational differences in regulatory regimes around 

the world. Consistency in regulation globally is important, but preserving regulatory 

independence and diversity of thought can also serve as a buffer against contagion 

or one-size-fits-all behaviors by financial firms that can result from one-size-fits-all 

regulatory approaches. Congress has delegated insurance regulatory authority to the 

States so we have a continuing obligation to engage internationally in those areas 

that impact the U.S. State-based system, companies, and consumers. U.S. State insurance regulation has a strong track record of evolving to meet the challenges 

posed by dynamic markets, and we continue to believe that well-regulated markets, 

both here and abroad, make for well-protected policyholders. Thank you again for 

the opportunity to be here on behalf of the NAIC, and I look forward to your questions. 

40 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM S. ROY WOODALL, JR. 

Q.1. Mr. Woodall, in regards to the international capital standards 

being developed and the historical differences between the U.S. and 

European approaches, stated, ‘‘When you try to harmonize those 

two, you’re creating the potential for great disruption in the delivery of different services in the marketplace, a potential raise in 

prices for consumers in the United States and potentially jeopardizes the availability of products.’’ 

Does this mean you see the potential imposition of international 

capital standards on State-regulated insurers as disrupting our Nation’s insurance markets and having a negative impact for U.S. 

customers? 

A.1. Yes, potentially. 

The upcoming introduction of capital directives from foreign organizations without any legal basis to promulgate regulations directed toward U.S. insurers, coupled with any implicit Federal commitments to impose such standards if not agreed to or otherwise 

endorsed by our State regulators, is inconsistent with our Congressionally chosen domestic system of prudential regulation of insurance companies. Beginning with the McCarran-Ferguson Act, and 

reaffirmed in the Gramm-Leach-Bliley Act and the Dodd-Frank 

Act, Congress has affirmatively entrusted the States and the State 

insurance regulators with the safety and soundness of insurance 

companies and the protection of consumers of insurance. Congress 

should consider whether the scope of Federal efforts to develop and 

coordinate Federal policy on international insurance prudential 

matters has gone too far in displacing authorities that Congress 

has reserved to the States and State regulators. 

The current pursuit of these types of international agreements 

has been occurring in an atmosphere of secrecy that is an anathema to our U.S. principles of openness, transparency, and oversight. Given that I, just like many members of Congress, am not 

fully informed as to what capital standards may lay ahead—yes, I 

am concerned about the potential negative impacts that may follow 

from imprudent, hurried and untested capital directives coming not 

from our own State insurance regulators, but rather from foreign 

organizations and foreign regulators who have a weak understanding of the fundamentally different basis on which the U.S. insurance regulatory system operates. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM S. ROY WOODALL, JR. 

Q.1. The historic role for international financial regulatory organizations was limited to fostering a dialogue between regulators and 

serving as a platform for cooperation between Governments. To me, 

it appears that mission has been greatly expanded. Today, these organizations issue rules that effectively bind their participants’ national Governments to new, internationally negotiated rules. 

As a legislative body principally charged with fair and efficient 

regulation of industry, isn’t Congress right to be concerned that recent mission creep at these international organizations is resulting 

41 

in regulatory decisions that do not have the input of their elected 

representatives? 

Should we consider refocusing the mission of international organizations on facilitating cooperation amongst regulators? 

A.1. Yes. 

Congress is right to be concerned about ongoing efforts by foreign 

organizations that could be used to mandate changes in decisions 

that Congress has left to our regulators, or that have been reserved 

for Congress itself to decide. Such concerns should not be limited 

to insurance regulation. U.S. financial market regulation is apparently also in the sights of such foreign entities. Several Commissioners at the Securities and Exchange Commission, for example, 

have been outspoken about this threat. 

Putting aside any debate as to how much influence the various 

foreign organizations do, or should, have over our domestic regulatory policies, I think we would all agree that international fora 

can play an important role in regulatory coordination given the 

global interconnections of the financial system. However, when 

such bodies by themselves decide to assume a position of primacy 

with the domestic regulatory policies of sovereign countries, including the U.S., even if such efforts are well intentioned, a concern 

will exist that the effort has gone awry. In my opinion, it is very 

important that Congress consider a clear statutory framework for: 

(1) fuller U.S. participation at these various foreign organizations; 

(2) the appropriate parameters of such participation so as to align 

with the domestic regulatory authorities established by Congress; 

and (3) the requisite level of reporting to Congress and transparency with the public. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM MICHAEL MCRAITH 

Q.1. Director McRaith, currently there is a lot of discussion, given 

GE’s recent divestment, around the SIFI de-designation process. If 

we assume there is a robust de-designation process that is set up 

by the Financial Stability Oversight Council (FSOC), the three current insurance companies designated as nonbank SIFIs make the 

appropriate changes to their businesses to become de-designated, 

and any insurance companies that own or are affiliated with a 

bank or thrift sell that bank or thrift. 

Under this scenario, can you tell me what insurance companies 

the Federal Reserve would have regulatory authority (or standardsetting authority) for? 

A.1. The Federal Reserve is responsible for the supervision of an 

insurer that is a bank holding company, savings and loan company, 

or is a part of either a bank holding company or savings and loan 

holding company, subject to certain conditions, and for an insurer 

that is designated by the Financial Stability Oversight Council 

(Council) to be subject to supervision by the Federal Reserve and 

enhanced prudential standards. The Council’s process for annual 

review allows any designated company to present information for 

the Council to consider when determining whether that company’s 

designation should be removed. Importantly, the Federal Reserve 

Board will determine the extent to which it will be involved in 

42 

standard-setting activities which may, in fact, be independent of its 

regulatory role. 

Q.2. How many staff members do you have that participate in or 

work with either the Financial Stability Board (FSB) or the International Association of Insurance Supervisors (IAIS)? What are 

their names? What is the exact role that each of them play with 

either one of or both organizations? (Please provide a detailed list.) 

Are these full time positions? Who pays the salaries of these employees? How much money does your organization contribute or 

provide to the FSB? How much money does your organization contribute or provide to the IAIS? 

A.2. FIO has 15 full-time employees, each of whom contributes to 

the work of the Office, including international matters. FIO staff 

are Treasury employees and are paid by the Treasury. FIO, 

through Treasury, pays an annual fee to the IAIS which, for 2015, 

was approximately $17,225. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM MICHAEL MCRAITH 

Q.1. Will you work with the State insurance regulators to gain consensus between the Federal Insurance Office, the Federal Reserve 

and the National Association of Insurance Commissioners (NAIC) 

before agreeing to an international capital standard? Would you 

support an international capital standard that is opposed by the 

NAIC? 

A.1. As required by law, FIO coordinates efforts to develop Federal 

policy on prudential aspects of international insurance matters, including on matters related to a global capital standard. This collaborative work with State insurance regulators and the Federal 

Reserve occurs many times each week at both the leadership and 

staff levels. Given FIO’s own collaborative practices, and that State 

insurance regulators are active participants in the IAIS’s consensus-driven deliberations, the potential for an outcome related to 

an international capital standard that is not supported by the State 

insurance regulators is very unlikely. Further, international standards are not self-executing. Each country implements international 

standards in a manner tailored to that country and its regulatory 

regime. In the United States, once developed, international capital 

standards are expected to be tested and then—only after testing— 

implemented at the Federal and State level. 

Q.2. The historic role for international financial regulatory organizations was limited to fostering a dialogue between regulators and 

serving as a platform for cooperation between Governments. To me, 

it appears that mission has been greatly expanded. Today, these organizations issue rules that effectively bind their participants’ national Governments to new, internationally negotiated rules. 

As a legislative body principally charged with fair and efficient 

regulation of industry, isn’t Congress right to be concerned that recent mission creep at these international organizations is resulting 

in regulatory decisions that do not have the input of their elected 

representatives? 

43 

Should we consider refocusing the mission of international organizations on facilitating cooperation amongst regulators? 

A.2. The financial crisis demonstrated many things including that 

(1) the insurance sector is an integral part of capital markets and 

the financial sector, and (2) the economies of different countries are 

increasingly connected. Further, in recent years, insurers based in 

the United States and elsewhere are finding opportunities for organic growth in new markets and developing economies. For these 

reasons, international insurance standard-setting activities involve 

technical subjects and are not limited to relationship building. 

International standard-setting activities promote global financial 

stability and equal footing for U.S. insurers operating around the 

world. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM KEVIN M. MCCARTY 

Q.1. Commissioner McCarty, in regards to the international capital 

standards being developed and the historical differences between 

the U.S. and European approaches, stated, ‘‘When you try to harmonize those two, you’re creating the potential for great disruption 

in the delivery of different services in the marketplace, a potential 

raise in prices for consumers in the United States and potentially 

jeopardizes the availability of products.’’ 

Does this mean you see the potential imposition of international 

capital standards on State-regulated insurers as disrupting our Nation’s insurance markets and having a negative impact for U.S. 

customers? 

A.1. Yes, that is a real potential and that is why State insurance 

regulators are working to ensure that the capital proposals developed at the International Association of Insurance Supervisors are 

reasonable and compatible with our system. We want to ensure 

that bank-centric standards based on mark-to-market accounting 

don’t inadvertently lead to unintended consequences such as limiting insurance products or stagnating growth in the insurance sector, including jobs and innovation. If these standards are excessive 

or too inflexible, then they could increase costs on U.S. insurers 

and consumers and undermine the U.S. State-based insurance regulatory system, which is based on protecting policyholders and has 

a strong track record of effective solvency supervision and stable, 

competitive insurance markets. If tailored for our regulatory system, there is value in understanding the capital adequacy of insurance groups, particularly when part of a larger conglomerate or affiliated with other entities. But that value only exists if it supplements and wraps around our existing legal entity standards. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY 

FROM KEVIN M. MCCARTY 

Q.1. The historic role for international financial regulatory organizations was limited to fostering a dialogue between regulators and 

serving as a platform for cooperation between Governments. To me, 

it appears that mission has been greatly expanded. Today, these orVerDate Nov 24 2008 12:26 Dec 21, 2015 Jkt 046629 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 L:\HEARINGS 2015\04-28 THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE
44 

ganizations issue rules that effectively bind their participants’ national Governments to new, internationally negotiated rules. 

As a legislative body principally charged with fair and efficient 

regulation of industry, isn’t Congress right to be concerned that recent mission creep at these international organizations is resulting 

in regulatory decisions that do not have the input of their elected 

representatives? 

A.1. Yes. We agree the role of international standard-setting organizations has evolved significantly since the financial crisis from facilitating cooperation and sharing best practices to advancing 

‘‘mandates’’ and sometimes insisting on prescriptive ‘‘requirements’’ 

that do not always have the full consensus of participating jurisdictions. Efforts of the International Association of Insurance Supervisors (IAIS) and the Financial Stability Board (FSB) are ostensibly 

under the auspices of the G20, and there are clear expectations and 

pressures to implement key standards regardless of whether they 

fit with a particular jurisdiction’s system and irrespective of legislative authority to do so. While it’s true these standards are not 

self-executing, the IAIS is leveraging the support of the FSB to expand its impact on domestic regulatory rulemaking and put pressure on jurisdictions to comply. Congress has an important role to 

play in overseeing the international insurance roles and policy objectives of the Treasury and the Federal Reserve, since both are 

deeply engaged in the decisions of the Financial Stability Board 

and the IAIS. 

Q.2. Should we consider refocusing the mission of international organizations on facilitating cooperation amongst regulators? 

A.2. Multijurisdictional cooperation and sharing of best practices 

can help elevate the quality of insurance regulation around the 

globe, and this will help promote more stable and competitive markets for our U.S. insurance companies operating internationally. At 

the same time, it is imperative that international organizations 

recognize that there will continue to be different cultural, legal, 

and operational differences in regulatory regimes around the world, 

and that uniform standards are not necessary to achieve compatibility and equivalent results. International standards should be 

flexible enough to deal with these structural and legal differences 

to avoid putting insurers, and by extension consumers, at a disadvantage in one market relative to another. As a practical example, a current reform underway in the State system is to reduce 

collateral required of foreign reinsurers. Reduction of this collateral 

is contingent on the foreign reinsurer’s domestic regulator being 

deemed a ‘‘qualified jurisdiction’’ by the NAIC. The NAIC has 

quickly made these assessments to establish full faith and confidence that our U.S. ceding insurers are doing business with a 

well-regulated reinsurer, and at no time have we asked any of the 

foreign jurisdictions to overhaul their regulatory systems to look 

more like ours or to follow some prescribed standard. That type of 

flexibility to foster trust and collaboration while respecting our differences is exactly what we should expect from international regulatory standard setters. 

45 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM KEVIN M. MCCARTY 

Q.1. I understand that the Federal Insurance Office (FIO), the Federal Reserve, and the National Association of Insurance Commissioners (NAIC) have frequent communication and participate in 

number discussions and calls on international insurance standards. 

As a result of these ongoing discussions, does the NAIC have a 

clear sense of what the Federal Reserve’s and FIO’s specific views 

and objectives are for the development of international capital 

standards? 

A.1. We have received very little in writing or on public record, and 

there is significant room for improvement. Communication and coordination among Federal agencies and State insurance regulators 

is essential to fostering a collaborative U.S. approach to international standard-setting activities at the International Association 

of Insurance Supervisors (IAIS) and the Financial Stability Board 

(FSB). While we appreciate the current levels of communication 

with FIO and the Federal Reserve, and we certainly exchange 

views on some matters, we do not have a clear picture of their policy objectives or level of commitment to ensure that U.S. Federal 

policy is consistent and compatible with our State-based system. 

The U.S. insurance sector, including company and consumer stakeholders, is handicapped because U.S. State insurance regulators 

are not engaged directly with the FSB on insurance matters, and 

because of the FSB’s lack of transparency and the recent retreat 

from open sessions at the IAIS. We would encourage more transparency across the board from the international standard-setting 

organizations and the U.S. Federal Government agencies in activities relating to international insurance standards. 

Q.2. Do State insurance regulators through the NAIC articulate 

their views on international capital standards to FIO and the Federal Reserve? 

A.2. Yes, we do. U.S. State insurance regulators are committed to 

providing an open and inclusive forum through the NAIC that provides transparency into the development of our policy positions and 

has proven effective for many years. We believe it is important to 

articulate our views on international capital standards not only to 

our Federal colleagues, but also to the larger stakeholder community. That is why we have been engaged in an open and public 

process with our Federal colleagues, industry, and consumer stakeholder through our ComFrame Development and Analysis Working 

Group (CDAWG) to update our position statements on ComFrame 

and international capital development. These public documents are 

posted on our NAIC Web site and serve to articulate State insurance regulators’ views toward the uses of capital within prudential 

regulation and help guide our ongoing work regarding IAIS capital 

proposals. 

46 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER FROM BENJAMIN M. LAWSKY, SUPERINTENDANT OF FINANCIAL SERVICES, NEW YORK STATE DEPARTMENT OF FINANCIAL 

SERVICES, SUBMITTED BY SENATOR BROWN 

47 

48 

49 

EXAMPLES OF INCENTIVES FOR ANNUITY BROKERS, SUBMITTED BY 

SENATOR WARREN 

50 

51 

52