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THE FEDERAL INSURANCE OFFICE’S 

REPORT ON MODERNIZING 

INSURANCE REGULATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND INSURANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

FEBRUARY 4, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–61 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON HOUSING AND INSURANCE

RANDY NEUGEBAUER, Texas, Chairman 

BLAINE LUETKEMEYER, Missouri, Vice 

Chairman 

EDWARD R. ROYCE, California 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

BRAD SHERMAN, California 

JAMES A. HIMES, Connecticut 

CAROLYN MCCARTHY, New York 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

February 4, 2014 .............................................................................................. 1 

Appendix: 

February 4, 2014 .............................................................................................. 63 

WITNESSES 

TUESDAY, FEBRUARY 4, 2014 

Cimino, Anthony, Acting Head, Government Affairs, the Financial Services 

Roundtable ............................................................................................................ 39 

Ehlert, Paul, President, Germania Insurance, on behalf of the National Association of Mutual Insurance Companies (NAMIC) ............................................ 41 

Hughes, Gary E., Executive Vice President and General Counsel, the American Council of Life Insurers (ACLI) .................................................................. 42 

Jensen, Jon, President, Correll Insurance Group, on behalf of the Independent 

Insurance Agents & Brokers of America (IIABA) ............................................. 44 

Leonardi, Thomas B., Commissioner, Connecticut Insurance Department ........ 9 

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

of the Treasury ..................................................................................................... 8 

Nutter, Franklin W., President, Reinsurance Association of America (RAA) .... 46 

Restrepo, Robert, President, Chairman, and Chief Executive Officer, State 

Auto Insurance Companies, on behalf of the Property Casualty Insurers 

Association of America (PCI) ............................................................................... 48 

Sinder, Scott, General Counsel, the Council of Insurance Agents & Brokers 

(The Council) ........................................................................................................ 49 

Zielezienski, J. Stephen ‘‘Stef,’’ Senior Vice President and General Counsel, 

the American Insurance Association (AIA) ........................................................ 51 

APPENDIX 

Prepared statements: 

Cimino, Anthony ............................................................................................... 64 

Ehlert, Paul ....................................................................................................... 70 

Hughes, Gary E. ............................................................................................... 85 

Jensen, Jon ....................................................................................................... 93 

Leonardi, Thomas ............................................................................................. 100 

McRaith, Michael .............................................................................................. 102 

Nutter, Franklin W. ......................................................................................... 109 

Restrepo, Robert ............................................................................................... 114 

Sinder, Scott ...................................................................................................... 118 

Zielezienski, J. Stephen ‘‘Stef’’ ......................................................................... 134 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Luetkemeyer, Hon. Blaine: 

Written statement of the American Academy of Actuaries .......................... 179 

Written statement of the Consumer Federation of America ......................... 181 

Written statement of Catherine Weatherford, President and CEO, Insured Retirement Institute (IRI) ................................................................. 183 

Written statement of Sean McGovern, Director, Risk Management, and 

General Counsel, Lloyd’s .............................................................................. 195 

Written statement of the National Association of Professional Surplus 

Lines Offices (NAPSLO) ............................................................................... 200 

Page

VI 

Luetkemeyer, Hon. Blaine—Continued 

Written statement of the National Conference of Insurance Legislators 

(NCOIL) ......................................................................................................... 206 

Royce, Hon. Ed: 

Written responses to questions submitted to Gary Hughes ......................... 208 

Written responses to questions submitted to Jon Jensen ............................. 210 

Written responses to questions submitted to Robert Restrepo ..................... 212 

Written responses to questions submitted to Scott Sinder ........................... 213 

Written responses to questions submitted to J. Stephen ‘‘Stef’’ 

Zielezienski .................................................................................................... 215 

Written responses to questions submitted to Thomas Leonardi .................. 218 

Sinema, Hon. Kyrsten: 

Written responses to questions submitted to Thomas Leonardi .................. 225 

Written responses to questions submitted to Michael McRaith ................... 269 

(1) 

THE FEDERAL INSURANCE OFFICE’S 

REPORT ON MODERNIZING 

INSURANCE REGULATION 

Tuesday, February 4, 2014 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING

AND INSURANCE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Luetkemeyer, 

Royce, Garrett, Duffy, Hurt, Stivers, Ross; Capuano, Velazquez, 

Clay, Sherman, Himes, Sinema, and Beatty. 

Ex officio present: Representatives Hensarling and Waters. 

Also present: Representatives Ellison and Green. 

Chairman NEUGEBAUER. This hearing will come to order. As previously agreed, each side will have 10 minutes for opening statements. I ask unanimous consent that Representatives Ellison and 

Green, who are not members of the subcommitee, be permitted to 

participate in the hearing. Without objection, it is so ordered. 

With that, I will begin with my opening statement. 

First of all, I want to thank you for coming to this important 

hearing examining the Federal Insurance Office (FIO) report on 

modernization and improving insurance regulation in the United 

States. The insurance sector is an extremely vital part of the U.S. 

economy, not only in terms of assets and asset protection, but also 

as a direct source of domestic jobs in this country. That is why it 

is imperative that Congress and the State governments work together to promote an insurance regulatory system that is efficient, 

dynamic, innovative, and responsive to consumer needs. 

Unfortunately, the absence of uniformity in the State-based insurance regulatory system has created some inefficiencies and burdens for insurance companies and policyholders. In fact, according 

to the McKinsey & Company, the cost associated with these inefficiencies is approaching nearly $13 billion annually. This is unacceptable and we must, and can, do better. Accordingly, I would also 

like to thank Director McRaith and his staff for putting together 

a thoughtful report that will hopefully restart the insurance regulatory modernization debate. 

Moving past arguments about the appropriate role of the FIO in 

these issues and their analysis of State efforts, this report goes a 

2 

long way in educating policymakers about the long-standing debates in the insurance marketplace, and will hopefully facilitate additional movement by the States towards more uniformity. 

On a positive side, FIO makes some recommendations that encourage States to improve uniformity, efficiency, and consistency in 

their regulatory system. For example, the report identifies the need 

for more coordinated State market conduct exams. It addresses inefficiencies in the State product approval process and presents useful arguments against State regulation regimes. 

These are examples of regulatory improvements that would be 

very constructive and would save costs for policyholders and the insurers. As such, the States must work diligently together to address these areas quickly or run the risk of ceding relevancy to the 

modernization debate. 

On the other hand, the FIO report missed the mark in some 

areas. It glossed over many of the statutory requirements of the 

study, such as the feasibility of regulating certain lines of insurance at the Federal level. 

And instead of wading into the more tangible issues like captive 

insurance regulation and corporate governance standards, the report also lights FIO’s ambitions that go way beyond its statutory 

direction by directly advocating for the Federal regulation of mortgage insurance and, more alarmingly, suggesting that potential for 

binding Federal standards for insurance risk classification methods. 

Further, while I appreciate the hard work of Director McRaith 

and his staff in this report, I am disappointed that it failed to provide any clarity on what strategic purpose the Federal Insurance 

Office serves. 

The FIO has been in existence for over 3 years, and it is still not 

clear what value the office brings to the policyholders and the domestic industry. Beyond its monitoring and consulting duties, the 

statutory objectives, FIO included insisting the SIPI designations 

for insurance companies administering the Terrorist Risk Insurance Program (TRIA), coordinating Federal insurance policy overseas, and making covered agreement preemption determinations. 

And yet, the initial SIPI determinations were met with strong dissent from the Federal insurance experts, and there have been no 

formal comments on TRIA, despite its impending expiration. 

Constructive coordination on international issues is largely absent and, to date, there have been no covered agreements. I want 

Director McRaith and his staff to succeed accordingly, and I hope 

2014 will be the year that we can finally see some constructive 

movement on these issues and that the FIO provides some value 

to the insurance consumers and domestic insurers. Thank you. 

With that, I recognize the ranking member of the subcommittee, 

Mr. Capuano, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman, and I appreciate having this hearing. Director McRaith, Commissioner Leonardi, and 

everybody else in the audience—and I am guessing that everybody 

else in the audience is actually on the second panel? 

[laughter] 

Yes. So, that counted people in the hall. 

[laughter] 

3 

This is a an important and a complicated subject that will bring 

out a lot of important issues that I look forward to discussing 

today. In many ways, I do wish that we had had the second panel 

first. Because I think there may be some things mentioned that I 

would personally like to hear Director McRaith’s responses to; 

whatever they may be, positive, negative, agreement or not, that is 

not the point. To me, I look at this as a discussion, an ongoing discussion, ongoing enlightenment for those of us who sit on this side. 

And also, I think an opportunity for self-internal reflection of all 

the people who are in the audience today who are going to testify 

on this. 

So, again, I appreciate today’s hearing. I look forward to the testimony. And I thank you all for being here. 

Chairman NEUGEBAUER. Now, the vice chairman of the subcommittee, Mr. Luetkemeyer, is recognized for 11⁄2 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. The regulation of 

insurance has not historically been a topic of much conversation in 

Congress, mainly because insurance has been, and remains, regulated by the States. That seems to be changing, and the FIO report 

on modernization speaks to this evolution in both productive and 

troubling ways. 

As I have said in the past, I remain concerned that the way the 

United States has regulated insurance is taking a back seat to 

international proposals. I want to remind our panelists that the 

current model of regulation has, in an overwhelming majority of 

cases, served the American people well. 

We can have efficient and consistent insurance markets without 

turning over the regulatory control to the Federal Government. 

Some modernization should, and I am confident will, happen. 

States should do a better job of coordinating and creating a more 

efficient insurance market. 

But be careful what you wish for. We can see by what is going 

on today in practically every sector of our economy that Federal 

regulation can be burdensome and punitive and, therefore, counterproductive. Any modernization needs to be focused. It needs to, 

first and foremost, address the needs of the American people and 

policyholders. 

Modernization efforts also need to bear in mind the considerable 

differences between the insurance industry and other financial 

services industries, and respect the unique State regulatory model 

that we have in place today. I look forward to a robust discussion, 

and thank our witnesses for joining us. 

And with that, Mr. Chairman, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Himes from Connecticut is recognized for 2 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. And I join the chairman 

and the ranking member in welcoming the witnesses for what is, 

as the ranking member said, going to be a very, very interesting 

discussion with very difficult issues. So I look forward to both getting through the testimony of the panels and hearing what you 

have to say. 

I also wanted to take a moment just to personally introduce and 

welcome my fellow nutmegger, Insurance Commissioner Thomas 

Leonardi of Connecticut. Mr. Leonardi, we are thrilled to have you 

4 

here. Those of you who don’t know Commissioner Leonardi—yes, 

he has a lengthy career in the insurance industry; 22 years before 

he was Commissioner, chairman and CEO of Northington Partners. 

He was chosen by the Treasury Department to serve on the FIO 

Federal Advisory Committee on Insurance. And he also serves on 

the executive committee and technical committee of the International Association of Insurance Supervisors. 

He has also been part of the team which, in the State of Connecticut, while the Federal healthcare.gov Web site was challenged, 

to say the least, helped roll out a spectacular insurance exchange 

which has now signed up 76,000 citizens of Connecticut for health 

insurance. This is in a State of 31⁄2 million people. Many of these 

76,000 people never even dreamed that they might some day have 

health insurance. So I thank you, Commissioner Leonardi, for your 

role in that. 

I would also note that Commissioner Leonardi is thoughtful and 

outspoken. He is known for his ‘‘Jerry McGuire’’ moment with respect to a letter he wrote on the NAIC, a very interesting memo. 

He is forceful, thoughtful, and clear in his thinking. Whether you 

agree or disagree with him, you always know where he stands. And 

Commissioner, I very much look forward to hearing your testimony 

today. 

Thank you. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from California, Mr. Royce, one of the 

senior members of the committee, is recognized for 21⁄2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. This does feel like deja 

vu all over again, as they say. We have sat right here before. We 

have received testimony from Treasury on studies on how to improve insurance regulation. We have heard from current insurance 

Commissioners. And we have heard from former Commissioners, 

who testified that uniformity was right around the corner. 

So in 2001—I went through my notes—2 State Commissioners 

testifying on behalf of the NAIC were asked by then-Chairman 

Oxley if uniformity and product approval was possible in 3 to 4 

years. 

And here is their response: ‘‘We have to meet that kind of goal. 

The current system is not good for consumers, and it is not good 

for insurance companies. If, over the next 2 to 3 years, you haven’t 

seen significant progress, then I think there need to be questions 

raised about whether we can effectively, at the State level, solve 

the problems.’’ 

As the FIO’s most recent report points out, the process for product review and approval still varies by State. And even where 

shortcomings have been addressed in life product approval, large 

markets like California, Florida, and New York have opted out. 

And the scope of the eligible product lines is limited. 

So we have promises made, we have the promises that were broken and the hearings that have happened over and over and the 

studies that get written. And then, they are forgotten. So here is 

what I would suggest, Mr. Chairman. This committee needs to look 

closely at these recommendations one by one and prioritize next 

steps to make some of them a reality, for once. And I, for one, 

5 

would start with a covered agreement, product portability and rate 

reforms. But we all know that this is not a committee of one. 

I challenge this committee to act on behalf of insurance consumers to let this study not be an ending point of our discussions, 

but a beginning. Otherwise, I am afraid we are going to be right 

back here again. 

And finally, while I was hopeful that today’s hearing would focus 

solely on the recently released modernization report, I would say 

that the timing of Commissioner Leonardi’s appearance is fortuitous. I do think the Commissioner’s recent letter caused quite a 

stir, as it criticized the NAIC’s internal governance, and it promoted transparency. That was the goal of that report. And I think 

that is a shared goal a lot of us would like to explore with the Commissioner today. 

And I thank you again, Mr. Chairman, for holding this hearing. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from California, Mr. Sherman, is recognized for 2 minutes. 

Mr. SHERMAN. Looking in from the outside, the idea of State regulation of insurance looks like we would have a race to the lowest 

common denominator. We have seen that with corporate governance laws where, in the absence of the SEC, I am sure one of our 

States would basically abolish shareholder voting and install management. 

But we had the best shakedown cruise one could ask for in 2008. 

We saw which parts of our regulatory system worked. And we saw, 

particularly with AIG, that those subsidiaries which were subject 

to State regulation remained healthy, and those entities under the 

same management, or overall management control which were not 

subject to State regulation required an enormous bailout. 

When we look at credit default swaps, we are basically looking 

at insurance. You are insuring that a portfolio of investments won’t 

decline in value. We disguise this by saying, well, we won’t write 

you a check if a bad thing happens. We will just let you, at any 

time, swap what is your bad portfolio—or that becomes bad—for a 

good portfolio. I think that is absurd. What if we had a fire insurance company that didn’t want to be regulated and said we don’t 

write a check to somebody whose house burns down. We just let 

you swap for the non-burned-down house across the street. 

That is fire insurance. That would be regulated. So I think the 

State system has proven itself to do well. That doesn’t mean we 

can’t do better with some action at the Federal Government. And 

I look forward to applying that system to disguised insurance 

when—instead of turning to the consumer and saying if something 

bad happens, we write you a check, we turn to the consumer and 

say, if you don’t like your burned-down house, your burned-down 

portfolio or whatever, you can swap it for U.S. Treasury bonds or 

a non-burned-out house or whatever. Going forward, I look forward 

to building on the present system of State regulation. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the chairman of the Capital Markets Subcommittee, 

Mr. Garrett, is recognized for 1 minute. 

6 

Mr. GARRETT. Okay. Thank you, Mr. Chairman, for holding this 

hearing for a long-awaited report on how to modernize and improve 

the system of insurance regulation in the United States. I would 

also like to thank the witnesses here, and the Director, as well. 

After reviewing the report, I was disappointed to learn that the report only lightly touches on many important international regulatory concerns despite being the area of their greatest activity behind the scenes. Foremost, the FIO report provides little substance, 

analysis or any recommendations concerning existing proposals for 

insurance regulations. 

For example, under the current ComFrame draft proposal, U.S. 

insurers could face international regulatory efforts to impose banklike regulations on U.S.-based insurers. These changes could disadvantage U.S. policyholders and U.S. insurance companies competing overseas. You see, insurance companies maintain very different capital structures from banks and, as such, should not be 

treated in the same manner when it comes to assessing capital requirements. 

Unfortunately, international insurance supervisor efforts are 

moving away from a coordinated approach and towards a top-down 

prescriptive prudential approach. And this wholesale change represents a net negative for U.S. policyholders and insurers, especially given the success of the U.S. State-based approach, which accomplishes the same type of protections using less capital and a 

different set of regulatory measures. 

Again, I thank the chairman for this hearing, and I look forward 

to the testimony that follows. 

Chairman NEUGEBAUER. I thank the gentleman. 

I now recognize the ranking member of the full Financial Services Committee, Ms. Waters from California, for 2 minutes. 

Ms. WATERS. I would like to welcome all of our witnesses to today’s hearing. Today, this committee will discuss the insurance industry, a sector critical to our economy and our way of life. In fact, 

the United States has the largest national insurance market in the 

world. In 2012, premiums in two critical insurance sectors—life 

and health; and property and casualty—totalled more than $1.1 

trillion. That accounts for approximately 7 percent of our Nation’s 

gross domestic product. 

In addition, the insurance industry plays a significant role in our 

job market, currently employing about 2.3 million Americans. We 

cannot underestimate the significance of changes to international 

insurance regulation. Even small changes can have a significant 

impact on American jobs, consumers, our economy, and global presence. With this in mind, Congress created the Federal Insurance 

Office to coordinate Federal efforts and develop Federal policy on 

prudential aspects of international insurance matters. 

Among other responsibilities, the Federal Insurance Office is 

tasked with assisting the Treasury Secretary in administering the 

Terrorism Risk Insurance Program (TRIA). While not the subject 

of today’s hearing, I want to reiterate the widespread support 

amongst Democratic members of this committee for the quick, 

clean, and long-term reauthorization of TRIA. I call on my Republican colleagues to consider the impact that unnecessary delays or 

7 

significant changes to the TRIA program will have on U.S. jobs, development, and our economy. 

I applaud the Department of the Treasury and particularly FIO 

for the release of this important modernization report. It analyzes 

the current framework for the U.S. insurance regulatory system 

and provides recommendations for improvement and modernization. The report notes areas where States can work to improve uniformity, and addresses the limitations of State law. It also identifies opportunities for a Federal role in areas where States cannot 

make necessary improvements. 

I would especially like to thank the Federal Insurance Office for 

the recommendations on marketplace oversight and consumer protections. While there is no question that more can be done to improve access in underserved communities, particularly minority 

and low-income communities, I see this report as an important first 

step. 

I know I speak for my colleagues when I say that we are ready 

to work with the Federal Insurance Office, the National Association 

of Insurance Commissioners, and the insurance industry to ensure 

all families benefit from the protections and opportunities afforded 

by insurance. 

I thank you, and I look forward to the testimony of our witnesses 

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

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentleman from Florida, Mr. Ross, is recognized for 

11⁄2 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. Having formerly served as 

chairman of the Florida House Insurance Committee, I am familiar 

with challenges and complexities inherent in insurance regulation. 

Florida’s geographic location and diverse population result in a 

unique marketplace that varies even within the State. Over the 

past few decades, our Office of Insurance Regulation has both 

achieved successes and has acknowledged failures. In many cases, 

we now have set industry standards that are modeled by other 

States. 

Florida’s unique marketplace, and the developed regional experience enjoyed by our regulators, underline for me the importance of 

State authority in insurance regulation. Accordingly, I appreciate 

FIO’s cautious tone. I think preserving and maintaining McCarranFerguson is very important. Unlike the haste of past regulations, 

we should be certain that any actions taken to improve and 

streamline regulation actually do improve and streamline regulation rather than create complex and duplicative processes. 

Finally, I hope to have a productive discussion today regarding 

the efforts of the International Association of Insurance Supervisors to create a framework for international insurance standards. 

As this process moves forward, it is critical that the interests of 

U.S. domestic insurers are adequately represented and their specific business models are recognized. I am concerned that not properly addressing these separate business models will result in higher premiums for American families who are already struggling with 

the high cost of health insurance. 

I look forward to today’s testimony, and I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

8 

We will now go to our panel. Each of our panel members will be 

recognized for 5 minutes. And without objection, your written statements will be made a part of the record. 

Now, it is my pleasure to recognize Mr. Michael McRaith, Director of the Federal Insurance Office. Mr. McRaith, welcome, and 

thanks for coming. 

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

Mr. MCRAITH. Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee, thank you for inviting me 

to testify. I am Michael McRaith, Director of Treasury’s Federal Insurance Office, or FIO. 

Title V of the Dodd-Frank Act established FIO and directed the 

office to study and report on how to modernize and improve the 

system of insurance regulation in the United States. The report 

was issued in December and can be found on the Treasury Web 

site. 

In drafting the report, our seminal premise was to evaluate the 

U.S. regulatory system as it is—not as it was or as one might wish 

it were. We learned that in 1904, President Theodore Roosevelt 

called for the establishment of a Federal insurance regulator. 

Since that time, calls for needed reform have been framed in the 

same binary debate of State or Federal oversight. However, this notion of either/or, one or the other, is a relic of a bygone era. The 

insurance sector in the United States is vast, enormous, and diverse. A critical asset protection tool for American consumers, insurance is an essential component of the U.S. capital markets and 

financial system. The sector includes complex internationally active 

insurance groups that will continue to pursue growth in non-U.S. 

markets. 

In the not too distant future, some flagship U.S. firms hope to 

generate more than half of net revenue from outside of our country. 

Insurance is increasingly connected with other aspects of the national and global economies, and our modernization report is 

grounded in this fact. 

As noted in the report, State regulators perform well the essential functions of localized consumer protection, including solvency 

oversight of individually licensed insurance entities. State regulators have worked to enhance multi-State collaboration, and the 

report reflects our respect for the work of State regulators around 

the country. 

At the same time, the inherent limits of State authority have resulted in prominent Federal supervisory roles. For example, the 

Federal Reserve supervises insurers at our savings and loan holding companies and those insurance firms designated by the Financial Stability Oversight Council (FSOC). The SEC reviews hundreds of indexed annuity products every year. 

And, of course, the FIO statutory mandate addresses gaps in insurance oversight, including key turning with respect to an insurer 

under Title II of the Dodd-Frank Act, the authority to monitor all 

aspects of the insurance industry, including its regulation, and the 

9 

authority to represent the United States on prudential aspects of 

international insurance matters. 

We also note that supporters of State regulation, even State regulators and NAIC staff, recognize the need for Federal involvement 

to deal with issues of multi-State inefficiency, as evidenced by their 

support for NARAB II, a Federal solution to a multi-State problem. 

In addition, the Federal Government provides support for private 

insurance markets. To name a few you are familiar with: the Federal Crop Insurance Program; the National Flood Insurance Program; the Terrorism Risk Insurance Program; and many others. 

Long-standing problems with State insurance regulation need to be 

addressed. 

Some are issues of inconsistency or unnecessary burden, like 

multi-State licensing or oversight of reinsurance captives. Others 

involve the national interest, and a direct Federal role is needed. 

For example, the private mortgage insurance industry is an essential feature of the national housing finance system, and warrants 

Federal standards and supervision. Fragmented approaches to solvency oversight do not serve homeowners, the industry, or the national economy. 

Our hybrid framework, a factual reflection of the system as it is, 

calls for targeted Federal intervention to resolve both the challenges of inefficiency and concerns of national interest. FIO will 

build on our outreach efforts to consumers and industry and to our 

State and Federal partners as we move to effectuate the recommendations of the report. We will report publicly on State and 

Federal progress to address the areas identified for improvement, 

and we will work with Congress and this committee to determine 

whether, and when, the time for Federal action has arrived. 

We will continue with our work to modernize and improve the 

U.S. system of insurance regulation at every point. Our priorities 

will be the best interests of the American consumers, the U.S.- 

based industry, and the best interests of the U.S. economy. 

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

[The prepared statement of Director McRaith can be found on 

page 102 of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, Commissioner Thomas Leonardi, from the Connecticut 

Insurance Department. Commissioner, welcome. Thanks for coming. 

STATEMENT OF THOMAS B. LEONARDI, COMMISSIONER, 

CONNECTICUT INSURANCE DEPARTMENT 

Mr. LEONARDI. Thank you. Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee, good morning. My name is Thomas Leonardi. I would like to first thank the 

subcommittee for providing me with the opportunity to appear before you this morning. I know that you had a pool of 56 Commissioners to choose from, and the fact that you selected me is both 

an honor and a privilege, which I greatly appreciate. I would also 

be remiss if I didn’t take a brief moment to thank my boss, Dan 

Malloy, the Governor of the State of Connecticut, for his unfailing 

support for me and my department, and for appointing me as his 

insurance Commissioner, a job that has been the most demanding 

10 

and rewarding in my 35-year career; and lastly for his vocal commitment to our national State-based system of insurance regulation. 

Hartford, Connecticut, has fondly been known as the insurance 

capitol of the world for over 2 centuries. We regulate the largest 

life insurance industry in the country and the second-largest when 

counting all insurance lines of business. In fact, Connecticut would 

rank as one of the 10 largest regulatory authorities in the world 

if it were a separate country. The industry represents nearly 10 

percent of the State’s gross domestic product, and is part of a huge 

financial services industry that employees more than one out of 

every five of our citizens. 

Clearly, Governor Malloy and the citizens of the State of Connecticut have a great interest in the issues before this committee 

today. I also want to thank Senator Ben Nelson, the NAIC CEO, 

for joining me. While I am here today to offer solely my views and 

those of the State of Connecticut, the FIO report impacts all of my 

fellow State regulators. At the outset, I want to note that the DoddFrank Act did not task FIO to provide a broad and balanced evaluation of insurance regulation. Rather, it was specifically tasked 

with identifying areas where it believed improvement was needed. 

Nevertheless, the FIO report, much like last summer’s GAO report, and the Financial Stability Board’s peer review, acknowledges 

that State regulators have developed an effective system of oversight that satisfies the most fundamental regulatory objectives: insurance industry solvency, and policyholder protection. We at the 

insurance department in Connecticut pride ourselves on meeting 

this objective every day. But to retain this pride, we must constantly be willing to improve and evolve to meet the next crisis or 

innovation. 

The FIO report contains several recommendations for near term 

reform by the States, as well as a few suggestions for direct Federal involvement in regulation. As you might imagine, every year 

State regulators, legislators, and even governors receive suggestions on various insurance regulatory issues from Federal agencies, 

international bodies, the consumers we protect, and the industry 

we regulate. All suggestions on any issue deserve serious and 

thoughtful consideration. In this case, State regulators are still in 

the process of evaluating the FIO report recommendations. And we 

will be meeting to discuss them later this month and in the months 

ahead. 

But I will offer a few initial observations. It is worth noting that 

we are already addressing many of the items identified in the report. In particular, transitions to principal-based reserving, the 

own-risk solvency assessment, strengthening of capital adequacy 

regimes, implementation of the Solvency Modernization Initiative, 

and discussions about improving our efforts on corporate governance and marketplace regulation are all ongoing. State regulation 

is not, and never has been, static. 

We have made significant enhancements to our system in the 

last several years, and the FIO report highlights several areas 

where that work continues. There are recommendations, however, 

that give me serious pause. For example, I oppose and I believe 

most other State regulators oppose the idea that FIO should be alVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
11 

lowed to participate in supervisory colleges. These are designed to 

be meetings of prudential regulators to share confidential, company-specific information. The presence of a nonregulator, even as 

well-intentioned as Treasury, would threaten the objective independence not just of State regulators, but regulators at the Federal 

and international levels, as well as the other participants in the 

college. 

In addition to this issue, State regulators also strongly disagree 

with FIO’s call for the Federal oversight of mortgage insurance. A 

strong regulatory framework is already in place, and efforts are underway to strengthen it. The financial crisis dramatically illustrated that simply federalizing regulation is no guarantee of better 

results. 

I appreciate FIO’s efforts and all the work that went into the report. I look forward to working alongside my State regulator colleagues, as well as State legislators and governors as we consider 

these suggestions. 

I would close by offering that the ultimate assessment of State 

regulation occurs not on paper, but in the outcomes we provide to 

policyholders and the industry. State insurance regulators oversee 

the broadest, deepest, and most stable insurance market in the 

world. And those markets weathered the worst financial crisis in 

generations extremely well. 

And they remain stable, competitive, and a solid cornerstone of 

the U.S. economy. Thank you again for the opportunity to be here 

today. 

[The prepared statement of Commissioner Leonardi can be found 

on page 100 of the appendix.] 

Chairman NEUGEBAUER. Thank you, gentlemen. We will now go 

to questions for the panel. Each Member will be recognized for 5 

minutes. The chairman recognizes himself for the first question. 

The identification of nonbanks and systemically important firms is 

a serious exercise that has serious implications for competitiveness 

in the insurance sector and the stability of our financial markets. 

And as you know, recently FSOC designated Prudential Financial as a nonbank SIFI that was to be subject to an enhanced prudential standard. Interesting enough though, this was over the 

strong objection of all of the voting members who have any insurance expertise. 

One of those members, Director John Huff, a State insurance 

Commissioner from Missouri recently stated, ‘‘FSOC’s misguided 

overreliance on banking concepts is nowhere more apparent than 

in FSOC’s basis for the designation of Prudential Financial.’’ He 

went on to say that the basis for the designation was grounded in 

implausible, even absurd scenarios. 

Commissioner Leonardi, what are your views on FSOC’s designation of Prudential Financial? 

Mr. LEONARDI. Congressman, let me start by saying that we in 

Connecticut regulate two very large subsidiaries of Prudential so 

we know the company quite well. And I completely agree with Roy 

Woodall and John Huff in their dissents. 

I thought the dissents were very compelling and very well written. I have said publicly that I do not believe Prudential is sysVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
12 

temic. I would also note that the lead regulator, Commissioner 

Kobylowski of New Jersey, has also made this same point. 

It is based on an assumption of a banking model where there 

could be a run on the bank and Prudential might have to sell a trillion dollars of assets the next day. And that is just—with one very 

rare exception—not a likely scenario on which to base a systemic 

designation. 

Chairman NEUGEBAUER. Director McRaith, do you agree with 

that assessment? 

Mr. MCRAITH. The FSOC process is a lengthy, detailed, highly 

technical process that involves many engagements with the individual firm. The voting members of the FSOC made the decision 

that Prudential should be designated. Those are tremendously accomplished, bright, hard-working people supported by tremendously accomplished, bright, hard-working staff. 

The decision by the Council stands. Whether Roy Woodall or Director Huff disagree is fundamentally of interest to the Council. 

Council members did not find their views persuasive. 

Chairman NEUGEBAUER. I think the concerning thing to me is 

that the voting members who had expertise in the insurance industry and had expertise in the regulatory structure voted against 

that. 

And is that basically the way the structure of FSOC is now, that 

as we begin to move forward with some of these other insurance 

companies, this is going to be a trend in that the people who have 

expertise in that area are going to be overridden by the people who 

want to impose some more bank-like regulatory structure on these 

entities? 

Mr. MCRAITH. The FSOC process is a thorough process that involves, again, many very smart people with different perspectives— 

Chairman NEUGEBAUER. I know. You said that before. But I am 

not interested in your opinion of whether those people are smart 

or not. I am really interested in your opinion of, do you think this 

is a troubling scenario that the people who know something 

about—or does that trouble you; that is a yes-or-no question. Yes, 

it troubles you, or no, it doesn’t. 

Mr. MCRAITH. It doesn’t trouble me because smart people can 

disagree. 

Chairman NEUGEBAUER. Director McRaith or I guess Commissioner Leonardi, I may go back to this. As somebody who is heavily 

involved in regulatory development overseas, the IAIS is working 

on a conferring proposal. While there are over 140 countries involved in the IAIS, the United States represents a staggering 40 

percent of the premium volume. 

So I would imagine we are the de facto leader on these issues. 

Yet, the Common Framework for the Supervision of Internationally 

Active Insurance Groups (ComFrame) seems to be European-driven, a one-size-fits-all regulatory regime, which includes bank-like 

capital assessments. What are your opinions on the direction that 

we seem to be going where we seem to be trying to model our regulatory structure after what the Europeans want to do? 

Mr. LEONARDI. Congressman, not surprisingly, I have been very 

outspoken on this issue as well. ComFrame has been out there for 

the entire time I have been Commissioner. It has been worked on 

13 

and a lot of effort has gone into it. It has had several drafts. One 

of the most recent drafts was over 150 pages. The new one, I am 

happy to say, is down to about 110 pages. It is going in the right 

direction. 

But we have long expressed our concern as State regulators that 

it is prescriptive, it is check-the-box, it is a one-size-fits-all. In 

terms of the capital standards, I think that is a broader question, 

but let me take a moment to talk about that, because we have been 

opposed, whether they be bank-like or not, there is a significant 

point there, that a global capital standard may not be appropriate 

right now, but it is being forced on the IAIS by the Financial Stability Board. 

And the concern is, what is the problem we are trying to solve? 

We don’t have a global accounting standard in insurance, like we 

do in banks. There has never been a global accounting standard for 

insurance companies. We have different solvency regimes throughout the world. 

And some of those are not fully implemented yet. So, my concern 

is that we are going to impose a global capital standard and we are 

going to actually do three capital standards right now. The IAIS is 

working on a back stock of simple capital standard that has to be 

done this year, followed by a higher loss absorbency capital standard, which is supposed to be in place next year for systemic companies. That will be tested by the ComFrame field testing test, and 

then the following year, the global capital standard. 

So we are talking about implementing three capital standards on 

very large, internationally active insurance groups where there is 

no global accounting standard. And we are rushing to do them all 

in 3 years, in a timeframe that I personally believe is reckless. 

Chairman NEUGEBAUER. Thank you. A quick follow-up here: Mr. 

McRaith, some people have said that this is a solution trying to 

find a problem. Can you quickly—and my time is already up—identify the problem that you think they are trying to address by 

changing these capital standards? 

Mr. MCRAITH. Two issues are driving the international work: one 

is from the financial crisis, we learned that financial firms that are 

large, complex, and international are connected and have impacts 

on local economies; and two, the international insurance marketplace is changing dramatically so that developing economies are 

seeing explosive premium volume growth every year. 

So our companies, U.S. companies, are pushing into new markets 

all the time. Those markets, those jurisdictions, want to know how 

is this company being supervised, can we trust its capital—that it 

is capitalized adequately. 

Chairman NEUGEBAUER. Shouldn’t they be trying to copy us 

rather than us copy them? 

Mr. MCRAITH. Yes, so the objective through the standard-setting 

work is to bring together people with different views, different perspectives, and different needs to talk about approaches in their respective jurisdictions’ identified best practices that are ultimately 

implemented—not added to, but implemented—as part of the native jurisdiction regulatory approach. 

Chairman NEUGEBAUER. Thank you. I now recognize Ms. Velazquez for 5 minutes. 

14 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Director McRaith, 

the FIO report implies that increasing Federal involvement will 

provide uniformity in insurance regulation and reduce costs for 

U.S. insurers and consumers. The report cites a McKinsey and 

Company analysis from 5 years ago, which estimated that up to 

$13 billion could be saved annually. Do you have a more recent estimate of the dollar amount savings, or if not, do you plan to update those numbers? 

Mr. MCRAITH. We do not have a more recent number than that. 

We are not aware of another independent study that has been used 

to evaluate the cost impact. It is a continuing important conversation for us to have, whether we will do an independent study or 

monitor the friction costs of individual reform items that we outline 

in our report. I can’t be sure at this point, Congresswoman. 

Ms. VELAZQUEZ. Okay, according to the FIO report, there is a 

disparity between the qualifying collateral requirements for U.S. 

versus international reinsurers. FIO has recommended that Treasury and USTR pursue a covered agreement for reinsurance collateral requirements based on the NIC model collateral law. What is 

the timeline for pursing such an agreement and when will you be 

notifying Congress of your plans as required by Dodd-Frank? 

Mr. MCRAITH. Thank you for that question, Congresswoman. As 

you well know, a covered agreement is a very serious undertaking. 

The authority that is vested in Treasury and the Federal Insurance 

Office in that context is a very serious responsibility. 

We have never done it before. We are sorting through the process, the initial steps, and look forward to notifying Congress once 

we have our own ducks, internally, in a row. We will be in front 

of Congress and we look forward to working with you in that effort. 

Ms. VELAZQUEZ. Do you have a timeline? 

Mr. MCRAITH. We look forward to moving forward as quickly as 

possible. 

Ms. VELAZQUEZ. Commissioner Leonardi, large-scale natural catastrophes are becoming the norm in the United States. Unfortunately, my district can attest to this firsthand. We saw millions of 

dollars in damage done to homes and businesses during 

Superstorm Sandy. 

Non-flood related property and casualty claims from the storm 

already top $6 billion in New York. The FIO modernization report 

recommends that States identify and implement best practices to 

mitigate losses from natural disaster. Can you kindly explain to us 

how Connecticut and other States are working to improve insurance practices for catastrophic events like Sandy? 

Mr. LEONARDI. Thank you, Congresswoman. I think it is important to point out first that as an insurance Commissioner, there is 

a statutory authority that I have in terms of building codes and all 

of those kinds of things which are impacting the issues you are 

talking about. 

I play one very small piece in that. So if it is a suggestion by FIO 

that the States, as a whole, at the governor level, that is something 

above my pay grade, so to speak, but I do know that as your nextdoor neighbor, the Sandy and Irene storms have taught all of us 

in the northeast an important lesson. 

15 

For example, our property casualty Director, George Bradner, 

has been involved in the Shoreline Recovery Task Force, which is 

a legislative task force within Connecticut’s legislature, along with 

the Administration, to work on these very kinds of issues. 

Ms. VELAZQUEZ. Thank you. Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentlewoman, and now the 

gentleman from Missouri, Mr. Luetkemeyer is recognized for 5 

minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Mr. McRaith, in 

your report you say that it is not whether insurance regulations 

should be State or Federal, but whether there are areas in which 

Federal involvement in regulation of the State database is warranted. Can you give me a definition of ‘‘warranted?’’ Where do you 

feel it is warranted for the Federal Government to step in? 

Mr. MCRAITH. The report identifies a number of substantive 

areas where reform is appropriate if the States are unable to impose the uniformity— 

Mr. LUETKEMEYER. Okay, my question is what do you believe is 

the criteria for the Federal Government to be warranted to intervene? 

Mr. MCRAITH. I would say there is an equation where we have 

to balance the consumer protection of disparate approaches Stateto-State and the benefits of uniformity for the industry. We balance 

those two and arrive at a decision of what is warranted. 

Mr. LUETKEMEYER. Do you work with the NAIC at all? 

Mr. MCRAITH. I speak with insurance Commissioners from 

around the country on a regular basis, with the officers of the 

NAIC— 

Mr. LUETKEMEYER. It would seem to me that one of the criteria 

for something being warranted is if they brought you the issue and 

said, hey, we have a problem with this. And yet, you didn’t mention 

that. 

Mr. MCRAITH. You might remember that I was insurance Commissioner in Illinois for 61⁄2 years before taking this job. So many 

of the issues, as Commissioner Leonardi mentioned in his comments, the States have been dealing with, in some cases for years, 

and even, in some cases, for decades. 

So there is a recognized need for uniformity by the States on 

many of these issues and we hope to work with them to help solve 

the problems of the lack of uniformity. 

Mr. LUETKEMEYER. Okay. In your report, you have 27 specific reforms, and basically only one of them deals with something of an 

international basis. All the rest of them deal with something going 

on in this country. In our last discussion—the last time you were 

here, the main impetus for your agency was to make sure that 

there was a relationship and a coordinated effort with regards to 

international insurance laws, regulations, and activities that would 

not be harming us in a negative way—that you could be working 

with them to preempt some of this stuff and yet, there is only one 

recommendation out of 27 here. It seems like our scope has 

changed. Am I missing the point here? 

Mr. MCRAITH. The focus of the report is how to modernize and 

improve the U.S. system of insurance regulation. We were not 

tasked with modernizing and improving the international standard 

16 

setting activities. Our focus internationally is to represent the best 

interests of the United States in the standard-setting forums at the 

IAIS, working with our State and other Federal colleagues, and 

that is exactly what we are doing. 

Mr. LUETKEMEYER. Mr. Leonardi, in your opening testimony, you 

made the comment that you are not really happy with one of the 

recommendations the FIO report makes mention of with regards to 

overset of mortgage insurance. Would you like to elaborate on that 

just a little bit? 

Mr. LEONARDI. I would be happy to, Congressman. As I mentioned, there are strong regulations in place. The States have a lot 

of experienced personnel. I think if the Federal Government feels 

there is a role to play, in my view, it would be to look at the poor 

credit underwriting and lending practices that existed in the lending and banking industry that led to these problems in the first 

place. 

The other thing I would mention is that there is a reference to 

permitted practices in mortgage insurance and I think it is referred 

to in annuities as well. And I think it is important to note that the 

permitted practices are being allowed in cases of really financial 

distress of a company, where much like in the financial crisis, the 

Federal Government took all sorts of extraordinary actions to help 

companies that would not have perhaps, made it through, get 

through. 

So these permitted practices were an alternative to pulling the 

plug. You have very experienced financial regulators working with 

industry to try to help these companies make it through to the 

other side. And in most cases, they did. 

Mr. LUETKEMEYER. Okay, so I guess my question would be, 

where is the problem that Federal oversight would be more important and beneficial than allowing the States to address this in their 

own way? 

Mr. LEONARDI. I don’t believe that it would be, Congressman. 

Mr. LUETKEMEYER. My time is about up. I will yield back. Thank 

you, Mr. Chairman. 

Chairman NEUGEBAUER. Thank you. Now, the gentleman from 

California, Mr. Sherman, is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. Mr. McRaith, as you know, TRIA is 

expiring at the end of this year. If TRIA expires without reauthorization, it would have an adverse impact on consumers and the 

marketplace in general. Are you working with the Presidential 

working group on TRIA? Does the Administration have an official 

position on TRIA and will they have one before the bill of the program expires? 

Mr. MCRAITH. We are working with the President’s working 

group on financial markets to produce a report. It should be forthcoming in the near future. My expectation is sometime this month. 

We are certainly working hard to get that done. That is not a 

promise, but that is certainly our aspiration. With respect— 

Mr. SHERMAN. We will put that in the record. It is a promise that 

it will be available by the 28th of February. 

[laughter] 

Mr. MCRAITH. No, no, please—I must learn to qualify my comments. 

17 

Mr. SHERMAN. I am going to move on to the next question. Mr. 

Leonardi, the report says that regulatory costs are about 6.8 times 

greater for an insurer operating in the United States than for one 

operating in the United Kingdom. Is moving from State to Federal 

regulation the solution? Is separate State regulation the cause of 

that 6.8? Is that 6.8 accurate? 

Mr. LEONARDI. I don’t know because I don’t know where the 

numbers came from. I would be happy to look into that and I think 

the same applies to the McKinsey report that was referred to earlier. As someone who came out of the investment world, $13 billion 

gets my attention. It is a lot of money, certainly. 

But I guess I would really appreciate the opportunity to see those 

numbers; and as to the McKenzie report, to see the assumptions 

and talk to the authors of the report to better understand. And I 

think that there may be low-hanging fruit that we could accomplish some savings without a lot of pain. And we should certainly 

do that if we can. But without seeing the report and seeing the assumptions underlying it, I don’t know. 

But there are two things— 

Mr. SHERMAN. I would hope you look at that report, and get a 

chance to talk to those who put it together and be able to provide 

for this subcommittee an analysis because—and I guess one thing 

we are assuming is that the United Kingdom regulation is the gold 

standard. And it could very well be that it is 6.8 times cheaper in 

the United Kingdom because they don’t do anything. 

Mr. LEONARDI. If I could address that—I think it is important to 

note that, as I mentioned, we regulate the second-largest industry 

in the country. We have a market of 3.5 million citizens. And we 

do it—our costs are 79 cents for every $1,000 worth of premium. 

So, that is one thing that I think puts it in perspective. 

I think the more important thing is, we always tend to look at 

expense, and we sometimes fail to look at what is the alternative. 

And if you look at the financial crisis— 

Mr. SHERMAN. I— 

Mr. LEONARDI. This is an industry where regulation has done 

well and where failure is an exception, not the rule. And we are 

still living— 

Mr. SHERMAN. I— 

Mr. LEONARDI. —with the after-effects of the banking— 

Mr. SHERMAN. —hear your point. I do want to go on to one other 

question, and that is, the report talks about the ‘‘failure of the 

mortgage insurance industry.’’ We had a circumstance where the 

bad actors in mortgages created a market in which any good actor 

would also lose a lot of money. 

If you invested in 100 pristine perfect mortgages, or insured 100, 

underwritten by the angels themselves—some people lose their job, 

more in 2009 than at other times. There are divorces, there are 

deaths, there are disabilities. And given what happened to the real 

estate market, you are going to lose money, even if you selected 

these—the mortgage insurance industry has been able to raise new 

capital. It is paying the claims on existing liabilities. It hasn’t needed a Federal bailout. 

You have some broad suggestion that the Federal Government 

should step in with regard to mortgage insurers. What is the basis 

18 

for this insurance? And could any—look, the ship took on a little 

bit of water, but it faced the most enormous storm and hasn’t needed a Federal bailout. Why do you think that—what is the basis for 

your assertion? 

Mr. LEONARDI. Congressman, nearly half of the industry failed 

through the mortgage—through the financial crisis. The industry, 

in fact, was entirely displaced by the GSEs following the crisis. 

That there are some companies with several hundred millions of 

dollars now in the market is encouraging. But what we need to 

know is that the housing finance system that is so important to our 

national economy supports the private mortgage insurance industry, replaces taxpayer exposure, supports the housing market. One 

standard implemented uniformly across the country by one agency 

is the best possible result for our country. 

Mr. SHERMAN. I would point out it is not just the mortgage insurance industry that was displaced by Fannie and Freddie. Basically, 

all lending for many years went through Fannie Mae and Freddie 

Mac. And I don’t think we have decided that all the major banks 

in the country failed. 

I believe my time has expired. Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentleman from California, Mr. Royce, is recognized for 5 minutes. 

Mr. ROYCE. Thank you again, Mr. Chairman. 

Let’s see. I would like to start with Mr. McRaith, if I could ask 

you a question. 

As you say in the conclusion of your report, any reform proposal 

must also account for the threshold issue of how that reform will 

be achieved. And with that in mind, I was going to ask you about 

steps that might be taken on the following reform ideas. One was 

allowing auto insurance portability for military personnel. I am 

working on draft legislation to sort of create that portability for 

policies across State lines. And I was going to ask you about that. 

And also ask you, and maybe the Commissioner, about working on 

this. But that would be one. 

Improving rate freedom was another issue that you raised. And 

I would like to get your feedback on that. 

Mr. MCRAITH. Great. First of all, with respect to members of the 

military who are serving on military bases, it is our understanding 

that they are ordered to move bases every 18 to 24 months. 

Mr. ROYCE. Correct. 

Mr. MCRAITH. I expect you know more about this than I do. 

When people like that in the service of our country are following 

their orders, we should make it as easy for them as possible to obtain necessary personal auto insurance coverage. We will bring together, as we say in the report, leadership from the industry, from 

the regulatory community, and from consumer and military service 

member advocates to arrive at the right solution. 

With respect to rate freedom or rate regulation, it is our view 

that competition benefits consumers. It is our view that rate freedom supports competition in many personal lines insurance markets. We want to see more of that around the country. We intend 

to work with regulators, and with industry to identify pilot 

projects. We would like to move on that as quickly as possible. 

19 

Mr. ROYCE. Thank you. 

I will ask Commissioner Leonardi the same question. 

After our last hearing, the NAIC took 4 months to answer my 

questions for the record, stating that it needed more time to make 

sure that the answers they gave us were accurate and complete. 

However, the answers we did get after 4 months were incomplete. 

The NAIC provided agendas for some closed meetings. But the 

dozens of handouts referenced in the agendas, which would reveal 

the extent of those closed-door policy-making meetings were not 

provided. And, as you know, this is an issue. 

Commissioner, I hope you will help convince the NAIC to provide 

the handouts for the closed policy-making meetings in question. 

The NAIC’s answers were inaccurate. They claimed any guidance 

by any NAIC committee or subcommittee or task force or working 

group is taken in open session, as required under the open meetings policy. That is clearly false, as people know. The agendas show 

that NAIC’s executive committee routinely deliberates in private 

about policy issues. And a massive regulatory modernization plan, 

the issues over health insurance, producer licensing—all of that 

was done in private. 

And just last October 25th, 4 days before its letter, NAIC abruptly closed a crucial executive committee meeting on the death 

masterfile for an hour of secret deliberations before returning to 

announce no action on it. 

So, the question I would ask you is, they claim to faithfully follow the policy statement on open meetings, which promises that 

the NAIC will conduct its business ‘‘openly,’’ in their words. Is it 

true that all NAIC committees and subcommittees conduct their 

business in open meetings? That would be my first question to you. 

Mr. LEONARDI. Thank you, Congressman, for the question. 

I want to start by saying that—and I am here as the Connecticut 

Commissioner. I have been asked to be here as the Connecticut 

Commissioner, as opposed to a representative of the NAIC today. 

I obviously take these issues very seriously. Governor Malloy and 

I are very firm believers in transparency and openness. You may 

know that there was a recent revision to the statement on meetings at the NAIC. I think we have gotten very positive feedback 

from industry on this. 

I would like to give Louisiana Commissioner and former president Jim Donelon a lot of credit for being the driving force behind 

pursuing this this past year. 

So, I do think that those are moving in the right direction. Exactly where we are with that, I can’t answer the specifics. 

I do think it is important for regulators to be able to set aside 

some time for candid discussions that are not necessarily open. And 

I think it is right—reaching the correct balance. 

Mr. ROYCE. Right, but the issues I am talking about are, in fact, 

policy issues. And so, because we are talking about the executive 

committee meetings being done against the policy of the NAIC, 

done privately, on important policy issues, these are not the types 

of issues that you would exempt from the open-meeting rules. 

And— 

Chairman NEUGEBAUER. Sorry, but the time of the gentleman 

has expired. I appreciate his questions. 

20 

We will now recognize the gentleman from Missouri, Mr. Clay, 

for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman, and I thank the witnesses 

for being here today. 

Let me start with Director McRaith. 

As your report notes, insurance premiums in the life and health 

and property and casualty insurance sectors totalled more than 

$1.1 trillion in 2012, or approximately 7 percent of gross domestic 

product. 

For several years, we have debated generally whether a Statebased system can answer the regulatory demands of such a national and increasingly global insurance market. You have identified several areas in your report where if the States themselves 

cannot improve, a Federal role is warranted. 

Can you provide a brief explanation as to how we can judge 

whether the States have taken matters to regulate effectively, and 

with sufficient uniformity? 

Mr. MCRAITH. The challenges of uniformity are described in the 

report. The industry is vastly different today than it was 5 years 

ago. It will be increasingly different in 5 years time. 

We will report, as I mentioned, publicly to this committee and 

otherwise on progress made to implement the reforms in the report. It is up to this committee and other interested parties to decide when is it appropriate for the Federal Government to be involved to impose uniformity and necessary efficiency improvements. 

Mr. CLAY. As I look through the report, I don’t see any reference 

to the topic of steering and red-lining within the insurance industry. And I would be naive to think that red-lining has been completely eliminated in the industry. 

Is there a way for the FIO to take a look into this area and report back to this committee? 

Mr. MCRAITH. Congressman, one of our explicit statutory responsibilities is to monitor the affordability and accessibility of insurance to traditionally underserved communities. 

We take that statutory responsibility very seriously. And we are 

moving forward consistent with the reforms described in the report. 

I should add, with respect to your state, the State department of 

insurance does collect information, and that is one of the few 

States that collects data on zip code and pricing, et cetera. And 

that information, I know, is publicly available. 

Mr. CLAY. And do you have any national data on—I guess on different regions or metropolitan areas? 

Mr. MCRAITH. At this point, we do not have any independent 

analysis on that subject. We would rely on external sources for information on that subject. 

Mr. CLAY. Okay. Thank you. 

Mr. Leonardi, as the insurance Commissioner for the State of 

Connecticut, you can speak very knowledgeably on the important 

insurance issues facing your State. 

However, you, of course, don’t represent other States. 

Some States, like your own, conduct a large amount of insurance 

business, while others conduct very little. 

21 

Isn’t this one of the reasons that there has been some difficulty 

in obtaining uniformity at the State level on many of the issues 

raised in the report, most of which, it seems, are not new? 

Mr. LEONARDI. I guess, if I could speak to the basis premise, because the report talks an awful lot about uniformity and lack 

thereof, and a race to the bottom. 

And the bottom line is, we have—I don’t think we do a very good 

job of explaining what we do and how well we do it. But we have 

a very rigorous accreditation program at the NAIC. And right now, 

every State is accredited. 

But when a State gets in trouble, when it has a review—and I 

was the vice chair of the accreditation committee for the past 2 

years, so I speak with some knowledge about this. We have had 

States that have been brought in, much like a regulator brings a 

company management in when it is concerned about issues. 

And we brought the States in before a group of Commissioners, 

and said, here are the issues, whether it is staffing, whether it is 

technical expertise, whether it is sloppy practices. These are the 

things we have found. These are the things you need to fix. Here 

is the timeframe within which you must fix them. And if you don’t, 

you are going to get your—you are going to be on probation and 

possibly have your accreditation pulled. 

So there are some very, very good floor standards, which everybody has to meet. And then there are States that do perhaps a 

much better job because there is a need because of the size of their 

industry. 

But I don’t think we have any States—and there is also an issue 

that maybe people think, maybe it is too easy because you have 

every State that is accredited. 

It isn’t easy. And I think we should celebrate the fact that we 

have managed to get to that level, where all the States are accredited. 

Just as a brief story, back in the early 1990s when the accreditation program was formed, Connecticut, the insurance capital itself, 

was told, you are going to lose your accreditation. You don’t have 

enough people. 

And the then-Commissioner, I think it was Commissioner Bob 

Guggens went to the legislature and went into the gold dome and 

kicked some chairs around and said, ‘‘We need to hire people. We 

need to do it right away.’’ 

The legislature responded. And we have been off and running 

ever since. 

But that is the way the process works. 

Mr. CLAY. Thank you so much for your response. 

Mr. Chairman, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from New Jersey, Mr. Garrett, is recognized for 5 minutes. 

Mr. GARRETT. I thank the chairman. 

And I thank the panel. 

So what we are talking about here, as with a lot of what we do 

in this committee, is somewhat technical and it is somewhat hard 

to relate back down to the consumer. 

22 

Some of the topics we have talked about so far include Basel III 

capital standards and their application, and, as the chairman was 

talking about, a one-size-fits-all approach to that. 

Now, the second panel does talk about that, if you looked at some 

of their testimony. I think they get into what this could mean, onesize-fit-alls applying in Basel III. 

If you look at some of their testimony, this approach would create some disruption for insurance companies’ balance sheets, it 

could affect policyholders. It could affect long-term guarantees, 

guarantees that carriers have made to families, to savers, to retirees. 

And with that background, that is why I said at the outset that 

I was concerned that the report doesn’t really dig into this whole 

area like I would hope to. 

So, briefly, Director McRaith, can you tell us how you are going 

to convey this significant information and impact to the Fed going 

forward, since we really just haven’t seen it either in the report or 

today? 

Mr. MCRAITH. As you well know, the decisions of how to implement Sections 165 and 171 of Title I of the Dodd-Frank Act, those 

are specifically within the province of the Federal Reserve. 

Mr. GARRETT. Right. 

Mr. MCRAITH. Our role, one of the reasons we were established, 

was to create a source of insurance expertise in the Federal Government. We work with the Federal Reserve through the FSOC 

context. We offer our views. But it is fundamentally a decision 

for— 

Mr. GARRETT. But I guess the point— 

Mr. MCRAITH. —the Federal Reserve. 

Mr. GARRETT. I get that. And I will skew on to the next question. 

I guess the point is is that this is a crucial area, this is an area 

that can directly impact my constituents back at home, if this were 

to be done, and we really didn’t see it. 

I get the point that you are supposed to be conveying this information. But we didn’t see it here. 

And playing off of something the gentleman from California was 

saying, he was talking about TRIA, but if you look into the statute, 

as to what you all are supposed to be doing, you have three or four 

different statutory obligations. Assisting with SIFI designations for 

insurance companies. Administering—assisting with information 

with regard to TRIA. As he pointed out, coordinating Federal insurance policy oversees. Making covered agreement preemptive determinations that you had talked about. 

And, as also indicated, the initial SIFI designation had significant impact—significant pushback from the industry. That was already indicated. 

And, of course, to come out with a report. And this report, as we 

know, is somewhat overdue, a couple of years overdue. 

So I guess the question again is, briefly, how do you characterize 

what these three or four major areas that are your statutory obligations and three or four areas that really haven’t been met to date 

on a timely basis, how do you give us a strategic purpose to actually say that we are going to get these things done in time? 

And then, again, to inure to the benefit of the consumer? 

23 

Mr. MCRAITH. We have done an excellent job in fulfilling our 

statutory mandate, Congressman. 

One reason we were created was to reflect the importance of the 

insurance sector in systemic risk— 

Mr. GARRETT. This report was late, though, right? 

Mr. MCRAITH. Yes, Congressman, the report was late. 

Mr. GARRETT. By how much? 

Mr. MCRAITH. The report by statute was due in January of 2012. 

Mr. GARRETT. Right. So, it can’t be an ‘‘excellent.’’ ‘‘Excellent’’ 

would be an A-plus or something like that, if we would have met 

the deadline or came in on time. 

‘‘Excellent’’ would be if you hit—we wouldn’t be—the gentleman 

from California wouldn’t be asking about a TRIA determination. 

Excellent, it wouldn’t be if these other areas, which are the statutory obligations had been met within the timeframe. 

So I just beg to differ with the classification. 

Let me go down a different road altogether and deal with something that you are familiar with: disparate impact. 

I can go into more of this, but you are familiar with disparate 

impact. How will you monitor underserved groups, because I know 

you say that you are going to be doing that in your report? 

Can you briefly talk about that, in 40 seconds or less? 

Mr. MCRAITH. One thing we are committed to not doing is repeating what has been done already. 

And, as you well know, Congressman, this debate about disparate impact, risk classification, insurance scores, is one that has 

been written about for 10, 15 years or more by many people from 

many different perspectives. 

We intend to talk to the industry, talk to consumers, as we have, 

to move the conversation forward in a way that is responsible, 

not— 

Mr. GARRETT. Very briefly, in 10 seconds, Mr. Leonardi, have the 

States not done an adequate job themselves in dealing with this 

issue? 

Mr. LEONARDI. I can only speak for Connecticut, but I think we 

have done a very good job. And we constantly do outreach on social 

media and education to reach the communities that we are trying 

to target. 

Mr. GARRETT. And do you need the Federal Government to assist 

you to get the job done? 

Mr. LEONARDI. Absolutely not. 

Mr. GARRETT. Okay. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now, the gentlewoman from Ohio, Mrs. Beatty, is recognized 

for 5 minutes. 

Mrs. BEATTY. Thank you, Mr. Chairman, and ranking members. 

Let me, certainly, join my colleagues in welcoming the witnesses 

on this first panel today. I am from Ohio, the 3rd Congressional 

District, and in Columbus, Ohio, a part of my district, we are the 

home to many insurers of all sizes and types. 

Let me shift the question to talk about terrorism risk insurance. 

When I reflect back on Boston and how traumatic and bad that 

was, although it wasn’t at the level enough to warrant being certified, I wanted to pose the question, and certainly you are aware 

24 

that without congressional action, the terrorism risk insurance will 

expire at the end of this year. 

This program creates a catastrophic government backstop for certified acts of terrorism in the United States. And many insurers 

have stated that they will not renew their terrorism risk policies 

unless the program is reauthorized. 

The modernization report that was released last year does not 

address terrorism or TRIA, but in footnote 77, it explains that the 

President’s working group on financial markets is studying it, and 

will issue a report on TRIA. 

Director, do you know how long it will be before this report will 

be released? And has your office looked at terrorism risk insurance? 

Mr. MCRAITH. Congresswoman, the expectation is that report 

will be released soon. By virtue of the fact that it is a President’s 

working group, that means there are four agencies involved with 

the discussion. And that process is moving forward. Thoughtful 

people are looking at every word of a document. 

We expect that to be released soon. 

We, in our office, as you know, have the statutory responsibility 

of assisting the Secretary with administering the Terrorism Risk 

Insurance Program. We are very well-versed on it, very well-versed 

on the issues. 

I think the expectation is that we will continue to be engaged on 

this issue. The Administration is likely to offer a policy view. Secretary Lew has previously acknowledged to the Senate and House 

committees his recognition of the importance of the program. 

Mrs. BEATTY. Okay. 

Being from Columbus, Ohio, where we have one of the largest 

universities in the country, the Ohio State University, which is the 

home of the fifth largest stadium in this country. And, as you can 

imagine, the cost of insurance coverage for both liability and property in the event of a terrorist attack is extremely high. 

In speaking with the financial department at the university, they 

estimate that if they were forced to purchase the same coverage in 

surplus lines market, like through Lloyd’s of London, that cost 

would be 2 to 3 times what they currently pay. How can we, as 

lawmakers, work to ensure that the long-term development of the 

robust terrorism risk insurance market—with limited government 

involvement—does not make it too prohibitive for them to purchase 

it? Do you have any thoughts on that? 

Mr. MCRAITH. I don’t want to offer specific policy thoughts at 

this time, because the Administration has not offered a view on 

that subject yet. However, what we see is that the terrorism risk 

insurance market right now functions well with the existence of the 

Terrorism Risk Insurance Program. The expectation is that if there 

are modifications or changes to that program, they should be 

thoughtful, with the objective of preserving an affordable and accessible terrorism risk insurance product. 

Mrs. BEATTY. Okay. Thank you, Mr. Chairman. I yield back. 

Chairman NEUGEBAUER. Okay. I thank the gentlewoman. That 

issue of TRIA has been brought up a number of times, Mr. 

McRaith. And you have used the word ‘‘soon’’ on that report. You 

and I have had some conversations about report dates, and ‘‘soon’’ 

25 

turned out to be later, rather than sooner. So I would say that if 

the Administration intends to have some input into this process, 

sooner would be better here. Because we are already beginning to 

put some policy together to address that. So, you might pass that 

along to the working group. That is, if they have some ideas, they 

probably need to be sending those over sooner, rather than later. 

I now recognize another Ohioan, Mr. Stivers. 

Mr. STIVERS. Thank you, Mr. Chairman, I appreciate that. And 

thank you, Director McRaith and Commissioner Leonarid, for being 

here. I appreciate your work on behalf of the U.S. regulatory system of insurance. And I want to ask Director McRaith the first 

question. How does the FIO coordinate with the Fed and the SEC 

and State regulators? And by that, I don’t want you to tell me that 

you have a great relationship with so-and-so, or you talk to so-andso. I am curious what the process for that coordination is, if there 

is one? Is there a formal process for that coordination with State 

regulators, as well as the Fed and the SEC? 

Mr. MCRAITH. Let me take those on separately. With the States, 

we have a variety of issues. And for domestic issues, we deal with 

them by speaking with NAIC officers, or going directly to the Commissioner responsible for— 

Mr. STIVERS. So, no formal process, other than— 

Mr. MCRAITH. We have a formal—last year we spoke—we had a 

regularly scheduled call, or discussion every 2 weeks. This year for 

international matters, because the Fed is also a participant at the 

IAIS now, for every meeting scheduled through the end of this calendar year, we have calls scheduled with the States and the Fed 

so all three parties will be on one call in advance of each meeting. 

And those calls are scheduled through the end of the year. The expectation is we will build on that, we will learn. Do we need to do 

more? Should we have meetings in person? But we will build on 

that. 

Mr. STIVERS. I will say, it troubles me that the Fed, with no insurance regulation experience, is now representing us in the international forum. I would rather have seen another State insurance 

Commissioner who has expertise. That is a personal opinion. And 

frankly, you have a role there, but I am bothered personally that 

the Fed, with no experience, is sitting at the table. We don’t need 

an empty suit at the table. I appreciate the Fed for many things, 

but I am not sure they add a lot of value at that table. I am not 

asking you to comment on that; that is a statement. 

The second question I have for you is, can you talk a little bit 

about the IAIS and transparency? I am really concerned that there 

is really not a lot of open access to the meetings. They won’t let 

observer members come into the meetings. They close a lot of information down. I just think that opaque nature makes it really hard 

for folks who are the dominant players in insurance in many of 

those jurisdictions. 

Mr. MCRAITH. The precise and appropriate level of engagement 

with interested parties is always a question. I heard it as a Commissioner at the NAIC. I heard it in—and we hear this now at the 

IAIS. I think the model we want is one where the industry, the interested parties are heard. Their views are respected. They are integrated where appropriate. And then standards are developed 

26 

based on that information. Now, the process of doing that, the mechanics of that process, we need to work through. Because what we 

don’t want to do is, we don’t want to send people around the world 

to meetings where we repeat what we talked about months before 

and rehash the argument. So we need to make the meetings efficient, but we need to integrate importantly, the views of interested 

parties. 

Mr. STIVERS. Thank you. One last question for Director McRaith, 

and then I hope to ask the Commissioner one question. What has 

the FIO done to advance the competitive position of the United 

States insurance industry since its inception? Have you—is that a 

focus for you at all to make sure that U.S. companies are competitive in foreign jurisdictions and— 

Mr. MCRAITH. Absolutely, that is a priority for us. The standardsetting activities, if developed and implemented appropriately, will 

promote competition and fair competition in the developing economies where our companies want to grow. 

Mr. STIVERS. Okay, that is a great transition to my question for 

the Commissioner. The United States has about 40 percent of the 

premium volume. The ComFrame appears to be very Eurocentric 

in my opinion, and I am just curious, what value does the 

ComFrame add to domestic policyholders, and domestic insurers? 

Commissioner, can you give me your opinions on those things? 

Mr. LEONARDI. I would be happy to, Congressman. I think the 

concern I have had with ComFrame, in addition to what I said earlier, is that we have policymakers debating policy in large documents. And then we have people who are in the field, actually managing supervisory colleges. If you look at the United States—when 

I became Commissioner, I looked at the Financial Sector Assessment Program (FSAP) the IMF did, and it pointed out one of the 

few areas of weakness in the U.S. insurance regulatory system was 

the use of colleges and group supervision, which goes right back to 

the heart of the financial crisis. And when I joined the Connecticut 

department, we had participated in three colleges: ING; Swiss Re; 

and Berkshire Hathaway. We led none. 

Today, we are involved in 16 colleges, and we lead six. We are 

the North American lead for three international companies, for a 

total of nine. We are working closely and collaboratively with, not 

only our State regulators, but regulators throughout the world. We 

are hosting regulators from the Swiss Financial Market Supervisory Authority (FINMA), and regulators from Taiwan and Saudi 

Arabia. We are coming to learn how we regulate companies. So I 

think what we need to do is step back and say again, what is the 

problem we are trying to solve with this very complex structure? 

Mr. STIVERS. Thank you. I yield back the negative balance of my 

time. 

Chairman NEUGEBAUER. Now, the gentleman from Texas, Mr. 

Green is recognized for 5 minutes. 

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

ranking member for allowing me to interlope today, and I am honored to have this opportunity to ask a few questions. I thank the 

witnesses for appearing. I would like to visit with you briefly, Mr. 

Director, on the question of arbitrage. With the different standards, 

and you have a multiplicity of jurisdictions, the opportunity for arVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
27 

bitrage exists and the report addresses this. Could you elaborate 

for just a moment on some of your concerns associated with arbitrage? 

Mr. MCRAITH. With 56 jurisdictions, the 50 States, the District 

of Columbia and five territories, there are different laws, regulations that are—even if adopted verbatim, are implemented differently. It is important, and our report emphasizes the importance 

of uniformity, not only of standards but of implementation and enforcement. An example of this is in the subject of reinsurance captives. Where while some might suggest it is an issue of the industry, our view is that it is less an issue of the industry, which is 

adhering to State laws, and far more an issue for the State regulators. 

States are competing against one another. Ultimately the transparency, the accountability, the capital supporting those captives 

remains a mystery in many circumstances. We need to do better 

as a country. 

Mr. GREEN. Thank you. And for edification purposes, for those 

who are not a part of the industry and don’t understand all of the 

jargon, would you just give a brief definition of ‘‘arbitrage?’’ The 

type that you are talking about, as it relates to the industry, 

please? 

Mr. MCRAITH. When I use the term ‘‘arbitrage’’ in this context, 

it is the pursuit of a lower level—the choice of a lower degree—of 

regulation or supervision as an alternative to a higher level of supervision. 

Mr. GREEN. The report recommends some 20 actions that should 

take place. And I am curious as to whether or not you think there 

are some things that Congress can do to assist in this effort? If so, 

could you kindly give us a few things that you might have us do? 

Mr. MCRAITH. Eventually—first, we want to keep you informed. 

We want you to be able to make determinations about, what are 

the issues of greatest interest to you? And when should Congress 

be involved in the immediate term? 

Our view is, Congress should look at two issues of particular importance. One is mortgage insurance. Housing finance is an issue 

this committee has dealt with, and with which Congress is dealing. 

The mortgage insurance industry should be subject to uniform 

standards implemented by a Federal regulator. 

Secondly, NARAB II, a bill this committee has considered, 

passed. The Senate has dealt with that issue. Multi-State licensing 

for agents and brokers is an issue in need of a national solution. 

Mr. GREEN. Final question, let’s talk about AIG for just a moment. 

As you know, AIG nearly collapsed. And my concern, or question, 

really goes to, with a functioning entity oversight, could AIG have 

been properly regulated such that the derivatives and all of these 

other exotic products would not have created the economic circumstance that caused us to have to go in and provide assistance? 

Mr. MCRAITH. It is hard to give a definitive answer to know 

whether a consolidated supervisor could have prevented all of the 

risk that the AIG financial products unit subjected to the entire 

economy, indeed to the global economy. What we do know is that 

we would have had a much better chance of identifying the probVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
28 

lem earlier, stifling it much earlier, reducing or mitigating the 

damage much earlier than we ultimately were able to learn under 

the system we had in place at the time of the crisis. 

Mr. GREEN. I will leave you with my speculation. My speculation 

is this: With a functioning entity, there would have been many who 

would have said that you should back off of AIG, that AIG was 

serving a specific role that was meaningful and that it would be inappropriate to have regulated AIG to any great extent. 

I am sure there would have been many voices who would have 

screamed, lay off AIG. I think that this work you are doing is vitally important to the stability of our economy and possibly to the 

global economy. 

I thank you for your service. 

I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

The gentleman from Virginia, Mr. Hurt, is recognized for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. I want to thank both of 

you gentlemen for appearing before us today on this important 

hearing. 

I represent a rural district in Virginia. We obviously have a lot 

of policyholders who benefit from the products that are generated 

through the insurance industry. 

One of the things that I hear as I travel around the district, 

though, especially as it relates to Dodd-Frank and access to capital 

on Main Streets all across our district, is that while there is often, 

as it relates to Dodd-Frank, a negligible, if any benefit to some of 

the rules that have been adopted, there is also a great cost. 

And that cost, when it outweighs the benefits, results in higher 

costs for consumers and fewer choices. 

So, I wonder about this report, and I recognize that there are 

several things in your report, Mr. McRaith, that you set out for direct Federal regulation, I guess my question is, is as you look at 

the—not getting into the possible things in the future, but the 

things that you all think that there really should be some direct 

Federal involvement in, to what extent have you all been able to 

analyze the sort of the costs and the benefits as it relates to having 

Federal involvement in mortgage insurance or any of the other 

items that you have laid out? 

And what has guided you and what is your—what do you report? 

Mr. MCRAITH. With respect to mortgage insurance, let’s be clear: 

Nearly half of the industry failed in the financial crisis. The proposal is a uniform standard implemented at the Federal level 

through a Federal supervisor. 

That will benefit homeowners and policyholders who have uniform capital standards implemented and enforced by a regulator at 

the Federal level. 

In the report, we look at a couple of options to promote product 

availability and to reduce price. First, how do we get products approved more quickly? We talk about the interstate insurance product review compact that promotes the more efficient approval of life 

products. We want to see more States participate in that compact. 

Second, rate regulation, as we talked about earlier, if we can restrict it in certain areas, if we can promote market competition by 

29 

reducing rate oversight, consumers—both families and individuals, 

and commercial consumers—will see more products available at 

less cost. 

Mr. HURT. Okay. 

And I think that every regulation that comes out of Washington 

is always, I am sure, very well-intended, and it is hoped, I guess, 

that the cost will outweigh the benefits. 

What are the costs that need to be looked—that you should be 

aware of? What are the costs? What are the risks that are associated with this, in your mind? 

And then I would like to hear from—in my time, which is diminishing, Mr. Leonardi, if he has any comments. 

So if you could just quickly— 

Mr. MCRAITH. I will be brief, Congressman. To be clear, in our 

report we do not call for the Federal Government to take over these 

issues. 

What we call for is the States to implement uniformity in a way 

they have been unable to do thus far and at a point that you will 

be involved with when their Federal action is needed, we will have 

a cost-benefit analysis for you, we will be able to to determine if 

some Federal role is the best alternative at this— 

Mr. HURT. Okay. And of course, Dodd-Frank requires that costbenefit analysis, statutorily. 

Mr. MCRAITH. Required or not, we would do that. 

Mr. HURT. All right. 

Mr. Leonardi, do you have any comments? A response to that? 

Mr. LEONARDI. I want to go back to the arbitrage question and 

AIG. As I mentioned in the accreditation issue, there are very 

strong accreditation processes in place. 

As to AIG, there is no question there were serious regulatory 

failures. What I think seems to be forgotten is those regulatory failures were Federal regulatory failures. 

In spite of the glossing over of the Office of Thrift Supervision’s 

role, it was the consolidated regulator. And if there was a lesson 

to be learned, it was that if there were supervisory colleges, if the 

Model Holding Company Act had been in place, if we had a group 

of all of the regulators at the table, including the Office of Thrift 

Supervision and the company, and somebody put the company on 

the block and said, what is the growth in this business and financial products in London, what does that mean, what are the risks 

associated with it, which is what colleges do. They want to understand management’s view of the risks that are being addressed by 

the management for what the company is writing. 

There would be far more confidence in a group of very smart people who are regulating pieces of the business, looking carefully at 

the company as a whole and that might have—I am not saying it 

would have, but it might have had a much better opportunity to 

stop that train wreck than by just depending on one consolidated 

regulator who has admitted in subsequent testimony that they 

didn’t understand what they had, and that it was a much, much 

bigger task and a much more complicated entity than any one regulator could have controlled. 

Mr. HURT. Thank you, Mr. Leonardi. 

My time has expired. 

30 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Minnesota, Mr. Ellison, is recognized for 5 minutes. 

Mr. ELLISON. Let me thank the chairman and also thank Ranking Member Waters for your consideration. I am very grateful. 

Mr. Leonardi, I just want to ask you a quick follow-up because 

I didn’t quite catch what you said. It sounded like you said that 

there was a Federal regulatory failure. 

With regard to the whole financial crash of 2008 and after, I 

agree. But I also agree it is a multisystem failure. And with respect 

to insurance, and in particular AIG was mentioned, do you say that 

was exclusively a Federal failure? 

Or do you think that the fact that we do insurance 50 different 

ways at least was partially at fault as well? 

Mr. LEONARDI. This may surprise you, Congressman, but I do believe that. I believe that it was a failure at the Federal level. If you 

look at the operating companies, those companies that the State 

regulators were regulating, they did extremely—when in fact Superintendent Dinallo in New York had approved an extraordinary 

dividend of $20 billion from the operating companies that he regulated that could go up to the holding company to help some of those 

problems in financial products group. 

So the other thing I think that needs— 

Mr. ELLISON. You know what? I do appreciate—maybe we could 

talk more later— 

Mr. LEONARDI. Sure. 

Mr. ELLISON. Five minutes, you know how it is. 

Mr. LEONARDI. Sure. 

Mr. ELLISON. But I just wanted to get clear on how you felt about 

that. Let me just ask— 

Mr. LEONARDI. Could I mention just one other quick thing, very 

quickly? 

Mr. ELLISON. Okay, yes, please quick, because— 

Mr. LEONARDI. I appreciate it. The Commodities Modernization 

Act of 2000 prohibited and prevented and preempted the States 

from regulating financial products, like derivatives. 

Mr. ELLISON. Okay, I get your point. And I thank you for making 

it clear. Director McRaith, I just want to get right to the heart of 

a question that has been in front of this committee, and that has 

to do with title insurance. As I reviewed your report, I noticed that 

title insurance wasn’t included in the report. 

I want to know, did you guys look into it? Some people on our 

committee might claim that—or their view would be that the affiliations are solely for efficiency. And others might argue that the affiliations hide hidden referral fees that cause customers to pay 

more. I actually am of the second school of thought. 

Did you all look into this? And what are your views on the topic? 

Mr. MCRAITH. Title insurance is an important issue, an important consideration. We did not cover the entire waterfront of potential areas for reform. There are many areas we heard about and 

learned about that we did not include in the report. That does not 

mean it is not important. 

Mr. ELLISON. Okay. 

Mr. MCRAITH. So we— 

31 

Mr. ELLISON. You don’t plan on touching on the issue? 

Mr. MCRAITH. We appreciate your admonition, and it is consistent with our own understanding of the importance of that subject. And I don’t want to comment too much on all of what we 

might do, but I think it is fair to say an issue like that is on our 

radar screen. 

Mr. ELLISON. I will just say for the record that it would be great 

to know what you all think about it as soon as you come up with 

a position. 

Mr. MCRAITH. Absolutely. 

Mr. ELLISON. And then, next, I think I have a map that I would 

like to put up, if it is available. I have a lot of constituents, as all 

of us do, from diverse backgrounds. Many of my constituents are 

same-sex couples. And one of the issues that has come to our attention is discrimination in insurance against same-sex couples. As 

you see, this is addressed on page 48, box 6. 

And as we know, same-sex couples face legal discrimination in 33 

States, all the pink States. And then on the screen, there is a map 

showing 17 States where same-sex couples have equal rights. So I 

guess my question is, why is marital status considered in underwriting decisions? Has the insurance industry done any studies of 

the risk levels of same-sex couples? And what does your report recommend to eliminate the discrimination in insurance? 

Mr. MCRAITH. Sir, I am not aware of whether the insurance industry has studied whether same-sex couples compare to differentsex couples with respect to marital status as a rating factor. We 

do know that marital status is a consideration on personal lines insurance policies, that the impact on auto insurance, for example, 

could be anywhere from 4 percent to 15 percent to 20 percent, depending on the individual and other characteristics. There are 

many variables that go in. 

And recently, we have learned that at least one standardized advisory organization is proposing rates for nonmarried people above 

the age of 30, which is a new development. Not a significant increase or adjustment, but a meaningful indication of change. 

Our report calls the question, asks the States, is it fair for samesex couples to be lawfully married in one State, then prohibited 

from being married in another State, and then charged more by an 

insurance company for what they are prohibited from doing? 

Mr. ELLISON. But would do if they could do. 

Mr. MCRAITH. Would do if they could. So it is fundamentally a 

question of fairness, and the report calls upon the States to examine this issue and explore the fundamental fairness issue of using 

marital status against a same-sex couple. 

Mr. ELLISON. I want to thank you gentlemen. And I yield back 

the time I do not have. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the gentleman from Wisconsin, Mr. Duffy, is recognized 

for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Just quickly, Mr. McRaith, what is FIO’s budget for 2011, 2012, 

and 2013? 

Mr. MCRAITH. I don’t know the numbers. Our budget is part of 

the larger departmental offices at Treasury, so I don’t know the— 

32 

Mr. DUFFY. How many full-time employees do you have? 

Mr. MCRAITH. We presently have 13 full-time employees. 

Mr. DUFFY. Okay. So you don’t know what that line item would 

be and how much FIO spends per year? 

Mr. MCRAITH. I don’t personally know that number off the top 

of my head, no. 

Mr. DUFFY. All right. Because I am concerned, as we look at— 

10 reports were to be submitted, as required by Dodd-Frank, and 

some were never submitted to Congress. Others were a little bit 

late, or a lot late. The one we are talking about today was almost 

2 years late. And one report was submitted on time. 

I think earlier you said one of the main goals that you have is 

to be responsive: ‘‘We want to keep Congress informed.’’ That was 

your quote. When you don’t submit reports to Congress as directed 

by Dodd-Frank, it is pretty hard to keep us informed. 

So if there is an issue with your staffing, if there is an issue with 

resources that is prohibiting you from providing these reports—I 

haven’t seen a letter that you have submitted that I have been cc’d 

on. I don’t know if you have sent a letter to the chairman. 

But if we are asking for reports from FIO, we expect to get them, 

and get them on time. I would just leave that point out there. And 

maybe another point I would ask is, do you deem these reports necessary, number one? Number two, is FIO incompetent in drafting 

these reports and sending them to Congress? Or do you not have 

the staff? Which is it? 

Mr. MCRAITH. The reports are important. Congress has asked for 

them. They are important subjects, and it is appropriate for the 

Treasury’s Federal Insurance Office to offer them to the country, 

to Congress, and ultimately to the international community, to understand the views of the Federal Insurance Office on the subjects 

to be addressed. 

Mr. DUFFY. We agree on that. Why haven’t they been submitted? 

Mr. MCRAITH. It is not a—excuse me? 

Mr. DUFFY. Why haven’t they been submitted or been submitted 

late? 

Mr. MCRAITH. I think the important reality for us is that we submit a report to you that is of appropriate quality, of appropriate 

depth and insight. And while we regret that— 

Mr. DUFFY. What— 

Mr. MCRAITH. — the modernization report was not provided in 

January 2012, we are pleased with the quality and importance of 

the report. 

Mr. DUFFY. What we expect is a quality report as asked for by 

Congress and on time. And that is not what you have done. So I 

will leave that point alone, but I think it is disrespectful to the 

elected body to not provide those reports as required. 

I want to move to mortgage insurance. You have indicated we 

have had failure in the mortgage insurance space, and it is your 

opinion that we should have a Federal regulator in the mortgage 

insurance space. Is that right? 

Mr. MCRAITH. That is the recommendation in our report. 

Mr. DUFFY. And some of those failures came during our Great 

Recession. So if the Federal regulator model works so well, can you 

point to me other regulators, Federal regulators, that performed 

33 

well during the Great Recession, during the financial crisis, that 

didn’t have any failures, that you can point to and say, listen, the 

State model doesn’t work, but the Federal regulating model does 

work, look at this agency that did so well, in insurance or in the 

financial sector? Because I think they have all had issues. What 

makes you think that you can do it any better than everyone else, 

leading up to the crisis? 

Mr. MCRAITH. I think the point of the recommendation is that 

there was failure throughout the mortgage insurance industry. We 

had to learn from that experience, learn from the crisis, learn, is 

there a better way to do that? That is why this committee and others in the House and Senate have dealt with reforming the housing 

finance system. As part of that, it is appropriate to have a federally-supervised private mortgage insurance industry. 

Mr. DUFFY. Sure. And I guess those recommendations would be 

taken far more seriously if you could provide high-quality reports 

in a timely manner. One other issue that I want to bring up—and 

I guess I am concerned about the role of the Federal Government 

in our insurance space, if you can’t tell that. And Dodd-Frank was 

pretty clear that you are here to monitor it. 

But in Treasury’s press release that came out recently, they said 

that you were proposing a hybrid Federal-State regulatory system. 

Does it say that in Dodd-Frank? Does it give that authority in 

Dodd-Frank? Where in that press release—where is that coming 

from, this hybrid model? 

Mr. MCRAITH. Fundamentally, Congressman, that is what we 

have today. We have convened Federal agencies involved with the 

insurance sector, either operating a program or involved with supervision. We have over 35 agencies attending a meeting like that. 

So as I mentioned in my opening comments, the Federal Reserve 

is involved, the SEC, the Department of Labor, the Department of 

Agriculture, the Department of Energy, and the Department of 

Housing and Urban Development all have some role in the insurance sector. 

So the report really doesn’t call for a Federal regulator, as you 

appreciate. What the report says is, we need to deal with real problems that are longstanding in the U.S. system of insurance regulation, and some of those will require Federal involvement, much 

like, for example, NARAB II, multi-State agent licensing. How do 

we solve a problem of a multi-State inefficiency? Congress passes 

a law. 

Mr. DUFFY. Thank you. And my time is up. I was hoping to ask 

some questions in regard to your view, Mr. Leonardi, on the expanded role of the Federal Government in our State insurance 

space, but my time has expired, and I will yield back to the Chair. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the ranking member of the full Financial Services Committee, Ms. Waters, is recognized for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

I welcome our panel here this morning. And let me just say that 

I recognize that Mr. McRaith came into this position almost a year 

after we passed Dodd-Frank, I believe. So I am sympathetic to any 

reports that were not released on time, as it was described by my 

colleague, and certainly I would not expect that you would have reVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
34 

sponsibility for that entirely. So I appreciate the work that you are 

doing and what it takes to do the work. 

Some of my colleagues here today have talked about some of the 

issues that I am concerned about. Mr. Clay asked about red-lining. 

Representative Hurt talked about costs versus benefits. And these 

are some of the areas that I am certainly interested in. 

I was a member of the California State Assembly for 14 years, 

and I worked on red-lining for almost all of those years. And, of 

course, having come from St. Louis, Missouri, in a low-income community, I learned a lot about insurance products and what was 

being pushed in the communities in my neighborhood. And I think 

a lot of that has been cured, but I am still concerned about what 

is happening in underserved communities. 

Now, as I understand it, part of FIO’s mission is to monitor the 

extent to which traditionally underserved communities and consumers, minorities, and low- and moderate-income persons have access to affordable insurance products. What have you done? And 

how did you do it? 

Mr. MCRAITH. The statutory responsibility to monitor affordability and accessibility is very important to our office. We have 

compiled data from external sources and are evaluating the best 

ways to measure affordability and accessibility. 

Our report identifies the subject of risk classification. How do 

companies go about pricing insurance products? The fundamental 

reality is that the data-mining technology available today is so 

much more powerful than even a few years ago. The data that any 

one of us could find out about any one individual is so much greater in volume than it ever used to be. 

We want to have a conversation about—and do—first of all, research and report on and discuss, what are the appropriate boundaries of the use of that now expansive world of personal information that is available about any individual, not just for insurance 

companies, although that is our area of interest, but really 

throughout the world? 

The data-mining technology is so much more powerful than it 

ever used to be. Individual products are sometimes priced with 

hundreds or more different factors, considerations about any one 

individual. We need to know, what are those factors? Do the States 

understand them? And then, thirdly, what are the boundaries that 

are appropriate on the use of all of that information? 

Ms. WATERS. I am very interested in keeping up with what kind 

of information you are putting together and how it is going to impact the underserved communities and what we can do to make 

sure that there is fair access. 

Let me just ask Mr. Leonardi, do you think that there has been 

significant improvement over the years in serving the underserved 

populations and minorities and our consumers in general, even in 

the rural communities that Mr. Hurt referred to? 

Mr. LEONARDI. I can only speak as the Commissioner from Connecticut on this issue, although I did, before I was Commissioner 

of Connecticut, live in a very, very rural part of upstate New York. 

But I will say that one of the things that Director McRaith just 

mentioned that I agree with is, there was a time when you might 

have 6 to 10 risk characteristics that the companies would look at, 

35 

and now they are looking at 50 to 75. So there is a huge amount 

of data that they have access to, a lot of computing power to slice 

and dice that, and what we do is—and I think we are one of the 

few States that requires it, we require that they provide their 

guidelines so that we can see what those results will lead to. 

And it may look fine on the surface, but if below the surface, if 

the conclusion is—of the data is that there is the potential to be 

red-lining—for example, some group, then we don’t allow that. And 

we are very strict about that. 

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

Chairman NEUGEBAUER. I thank the gentlewoman. 

And now the gentleman from Florida, Mr. Ross, is recognized for 

5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Director McRaith, since 1945 the McCarran-Ferguson Act has 

been the foundation upon which we have had strong consumer protections because of good and sometimes bad State regulation, but 

I think a good market for consumers. You have alluded to—and I 

agree with you—that what we have in this country now is a hybrid 

market, and you have given some examples of that, TRIA, NFIP, 

and even the Affordable Care Act are involvements of the Federal 

Government in the regulation of insurance markets in this country. 

And my concern is, is that based on your report, the FIO report, 

and your recommendations, if those recommendations are not met, 

what would you anticipate FIO to do? 

Mr. MCRAITH. The first thing we are going to do is bring people 

together to try to solve the problem. We are doing that already. If 

we get to a point where the problem is not solved, then there needs 

to be—hopefully we can present a solution— 

Mr. ROSS. And that is where my next question goes to, that solution. Do you anticipate coming back to Congress asking for regulatory authority? 

Mr. MCRAITH. No, my expectation is this—the report, as you 

note, does not call for a Federal regulator, to the surprise— 

Mr. ROSS. I appreciate that. 

Mr. MCRAITH. —of some. What we say is we need to solve the 

problem. And rather than focus on, should we develop some structure that implements something one way or another, our objective 

is, solve the problem. So, for example, I cited NARAB II, something 

that this committee has supported. That is an example of a Federal 

role to impose uniformity where needed. 

Mr. ROSS. So you don’t anticipate seeking any regulatory authority for FIO in any time in the future or at all? 

Mr. MCRAITH. What I anticipate is working hard to fulfill our 

current statutory mandate. 

Mr. ROSS. And having been an insurance Commissioner for 6 

years—in fact, I think you and I were on a panel years ago in Illinois— 

Mr. MCRAITH. That is right. 

Mr. ROSS. —you have been very familiar with McCarran-Ferguson. Let me ask you directly: Do you think that the McCarranFerguson Act as it exists today should either be upheld and left 

alone, modified, or repealed, and why? 

36 

Mr. MCRAITH. I don’t have an opinion on the McCarran-Ferguson 

Act. The bottom line is, we need to move away from the State 

versus Federal debate, because it has stifled solutions to problems 

that in some cases have been around for decades. 

We need as a country to provide better and more efficient regulation for consumers. In many cases, the States can do this. In some 

cases, it is going to require Federal help. 

Mr. ROSS. And you have acknowledged, I think in your report, 

that consumer protections have been handled better by way of 

State regulation. Would you agree with that? 

Mr. MCRAITH. Generally speaking, that is true. And the reason 

is exactly the reason you stated in your opening comments, which 

is, in the P&C industry in particular, there are very localized 

needs. Sometimes, within a State, one county is different from another. 

Mr. ROSS. Exactly. Risks are not homogeneous. They are heterogeneous, essentially. 

Mr. MCRAITH. That is correct. 

Mr. ROSS. We see that on all types of geographic locations. 

Speaking in terms of our domestic insurers and their protections, 

we are losing market share, we are losing premium to foreign and 

especially European carriers. My concern is Solvency II. My concern is the backdoor of ComFrame. What guarantees or assurances 

can you give us that our domestic carriers can be protected, especially in light of different standards of capital requirements there 

may be as a result of Solvency II? 

Mr. MCRAITH. Importantly, the international activity is the development of standards. It is the development of best practices for 

companies around—for supervisors and companies that are operating around the world. Before those standards are implemented, 

it will require some action by the States or the Federal Government to implement those— 

Mr. ROSS. And then that is where FIO plays a role, to sort of be 

the spokesperson in those negotiations? 

Mr. MCRAITH. Our view is, we should assert on behalf of the 

United States leadership in these conversations, work to develop 

consensus with our international counterparts, but provide the 

leadership that the United States justifiably should provide. 

Mr. ROSS. And protect—thank you. 

Mr. Leonardi, quickly, I have only 45 seconds left. Talk to me 

about mitigation and its importance. 

Mr. LEONARDI. Mitigation, in terms of catastrophe? 

Mr. ROSS. Yes. 

Mr. LEONARDI. I think it is extremely important. I think that a 

number of the insurance companies, the large property, casualty, 

and reinsurance companies have recognized the need for mitigation. I think the issue is getting those provisions passed through 

legislatures, whether it be shutters for windstorms or fixing the 

shoreline, moving back from the shoreline and rebuilding, and 

things like that. 

Mr. ROSS. Thank you. And one really quick last question, Mr. 

Leonardi, is there anything that you would propose to allow for the 

investment of private insurance for flood insurance purposes in 

your State? Any changes to the law today? 

37 

Mr. LEONARDI. We actually have just allowed a private insurer 

or a private insurer of flood insurance to sell, along with about 15 

other States just in the last 3 weeks. So we would— 

Mr. ROSS. It is out there. Capacity is out there, in your opinion? 

Mr. LEONARDI. Yes. 

Mr. ROSS. Thank you. I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now the ranking member of the subcommittee, Mr. Capuano, is 

recognized for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Thank you, gentlemen, for I think a thoughtful and insightful 

discussion. Mr. Leonardi, I think you have advocated for a while 

now very effectively a very strong States’ rights approach towards 

insurance regulation, and I respect that. And I agree with some of 

it. I am not sure I agree with all of it. 

But I want to be sure that I understand how vehement you 

might be. Do you agree that some reasonable, thoughtful people 

might disagree with the absolute ban on any Federal involvement 

in overseeing any part of the insurance industry? 

Mr. LEONARDI. I am not sure if I—I don’t want to answer that 

in the negative. The answer is, yes, I obviously—as the Director 

has pointed out on several occasions here this morning—that the 

Federal Government has a role in a number of areas, flood insurance, whether that is a good or bad thing, TRIA, health insurance, 

and so on. 

So, it is what it is. I guess what I wouldn’t want is to use the 

fact that we have these in place for specific reasons to open the 

floodgates of saying, we don’t need State regulation anymore. We 

really need to have the Federal Government come in and do things, 

again, fixing what is not broken, I guess is what— 

Mr. CAPUANO. Right. I am not aware—there must be somebody— 

of anybody that I have talked to who would advocate such a wholesale, immediate transition. But there are those of us who think 

that some companies—never mind the individuals—may be tired of 

dealing with potentially 91 different regulators, 56 on the State 

and regional level and 35 Federal agencies. Some people might 

want to reduce that number and deal with only 30 or whatever the 

number might be, number one. 

Number two is—I have been involved with financial services for 

a long time, mostly in the banking end of it, and I will tell you that 

I remember very clearly it wasn’t long ago that banks had to be 

incorporated in a State, and it was a big brouhaha about interstate 

banking. Today, nobody would think twice about that, and actually 

some people in this room probably don’t even remember that. Not 

many. A lot of you are at least as old as I am. 

But things change. The insurance industry has clearly and unequivocally changed over the years, as you have said yourself, and 

become much more complicated. And by the way, as far as all those 

rating factors go, there is still red-lining going on, in my opinion. 

It may not be the old-fashioned, evil intended red-lining, but the 

effect is still the same. Even with all those rating factors, I know 

people whose auto insurance is significantly different simply by living one street away; because they live in a different ZIP Code, their 

38 

insurance is half as much, and ZIP Codes do relate to certain redlining-related issues. But that is a different discussion. 

I don’t have much to add to this discussion at the moment. I 

think the Director has thrown a lot of issues on the table, rightfully 

so, obviously not all of them, but a lot of them for discussion. And 

I think that your participation in this discussion is very important. 

I think it has been very thoughtful, very enlightening, and I just 

want to say thank you very much. 

Because this is a very difficult area where I think it is inevitable 

that we will slowly move towards more Federal involvement, simply because of the complexity and difficulty and the internationalization of all businesses, not just insurance. So I think that is inevitable, but I also think that it should not be done quickly. It 

should not be done simply by throwing out a system that has 

worked relatively well up until this time. 

And I do think that it requires the engagement and the involvement of everybody at the table, and I just want to thank the Director for your thoughtful and insightful report that raises a lot of 

questions. And, Mr. Leonardi, yours and NAIC’s involvement with 

your views of the world, too, that I actually think some of them are 

very valuable. Some of them we may have disagreements on, but 

they are professional disagreements, and not esoteric ones for me. 

So I just want to say thank you very much for your participation 

today. 

Chairman NEUGEBAUER. I thank the gentleman. And I think that 

is all of the Members who have questions. Mr. McRaith, I want to 

thank you again for your support for NARAB II. We are hopeful 

to get that across the line. We think that is a positive step for the 

industry. 

Mr. Leonardi, thank you, again, for your attendance. And this 

panel is now dismissed. 

The second panel is a fairly large panel, so as one group leaves, 

if the other group could get in place, and we will try to get started 

here as quickly as we can. Again, thank you for your service. 

So, we will get started. If those of you who would like to have 

a sidebar conversation would do that outside, we would appreciate 

that, so we can close the doors, and get started. 

As it has been alluded to, we have a large, but very distinguished 

second panel. And the reason that the panel is the size it is, is that 

it has been the commitment of this chairman and our subcommittee to be as transparent and open and give people an opportunity to express themselves, and this is kind of new territory for 

the Federal Government to be in this role of FIO, a new organization. It has an impact on the industry, has an impact on consumers, and so we wanted to give the industry and other interested 

parties an opportunity to make their comments on this very first 

report. 

And so, we have Mr. Anthony Cimino, vice president of insurance 

and trade for the Financial Services Roundtable. Welcome. He is a 

former Hill staffer; he served on the staff of this committee, I believe, in the past. 

Mr. Paul Ehlert, president, Germania Farm Insurance, on behalf 

of the National Association of Mutual Insurance Companies. I 

might mention that Paul is from Texas. It is good to have you here. 

39 

Mr. Gary Hughes, general counsel for the American Council of 

Life Insurers. It is good to have you here. 

Jon Jensen, president, Correll Insurance Group, on behalf of the 

Independent Insurance Agents & Brokers of America. 

Mr. Frank Nutter, president, Reinsurance Association of America. 

Mr. Robert Restrepo, president, chairman, and CEO of the State 

Auto Insurance Companies, on behalf of the Property Casualty Insurers Association of America. 

Mr. Scott Sinder, partner, Steptoe and Johnson, on behalf of the 

Council of Insurance Agents & Brokers. 

And Mr. Stef Zielezienski is general counsel for the American Insurance Association. I thank all of you for being here. 

And with that, we will recognize Mr. Cimino for 5 minutes. 

I will remind each one of you that without objection, your written 

statements will be made a part of the record, as well. 

STATEMENT OF ANTHONY CIMINO, ACTING HEAD, GOVERNMENT AFFAIRS, THE FINANCIAL SERVICES ROUNDTABLE 

Mr. CIMINO. Thank you. Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee, thank you for the 

opportunity to testimony before you today. 

My name is Anthony Cimino, and I am the acting Director of 

Federal affairs at the Financial Services Roundtable (FSR). My testimony today is going to focus on four key points. I will detail the 

need for a strong and effective Federal Insurance Office. I will 

identify the principles FSR believes should underpin insurance regulatory modernization. I will address certain report recommendations in greater detail. And I will urge Congress and the FIO and 

the NAIC to develop an action plan to improve the insurance regulatory system. 

To start, FSR shares the view of many that the insurance regulatory system can be improved. To advance reforms, FIO must be 

a strong, effective force which will allow it to examine insurance reform on a broad national scale, interacting with State regulators on 

a consistent basis and objectively measuring progress. 

In addition, FIO should serve as an educational resource to the 

Federal Government. The Federal Reserve, for instance, will oversee certain insurers that have banking operations or have been 

designated as SIFIs. Consequently, the Fed must now develop expertise in the insurance sector, which has vastly different risk, capital, and business models than banking institutions. FIO has a 

clear role in serving as that educational resource to the Fed and 

other Federal agencies. 

Further, international forums and standard-setting efforts are influencing U.S. regulation. FIO must be a strong voice representing 

the U.S. interests, coordinating effectively with other stakeholders, 

including USTR, the Federal Reserve, and the NAIC. 

Now, as to the principles of reform, FSR urges policymakers to 

use the following principles to underpin any modernization efforts. 

First, reform should establish uniform regulatory standards. Uniformity is a critical aspect of effective insurance regulation. Different standards and treatment across States increase compliance 

costs that ultimately drive up prices for consumers and, in some 

40 

cases, restrict product offerings. FIO should elaborate on uniform 

standards that will bring greater efficiency to consumers and the 

carriers. 

Second, reforms should facilitate open and competitive markets. 

Regulatory policy should encourage innovation and product offerings and spur healthy price competition. Consumers benefit from 

competition and the ability to choose products and services that 

suit their needs and that are priced appropriately because of competitive market pressures. 

Third, reforms should establish effective and streamlined regulations. FSR supports improved regulations. We caution that the 

model articulated in the report could lead to increased dual regulation, which may result in duplicative and consistent or possibly 

even conflicting demands. It will be important that we make sure 

to avoid those pitfalls. 

Now, as to specific recommendations contained in the report, 

FSR supports many and has questions on a couple. With respect 

to capital standards, FIO notes in its report the different business 

model and risk profile of insurance companies compared to banking 

institutions and, as a result, the need to craft different and more 

appropriate tailored standards for insurers as they hold capital. 

FSR represents both banks and insurance companies and is 

uniquely positioned to understand the difference between these two 

models and the need to apply a more tailored capital approach to 

insurance companies. FSR supports efforts to do so. 

Second, FSR agrees with FIO’s recommendations on the improvement of the product approval process. We also urge Congress to 

adopt NARAB II. And we understand the need to identify and implement natural catastrophe mitigation standards. 

There are, however, issues where we look forward to further information regarding FIO’s plans. For instance, the report recommends States examine the impact of different rate regulation regimes and that FIO work with the States to establish a pilot program for rate regulation to maximize insurers in the marketplace. 

FSR believes that an environment that increases competition ultimately drives down prices and serves consumers better. We look 

forward to more guidance on FIO, on how to—on how it might advance this objective. 

Second, the report recommends that Treasury and USTR pursue 

a covered agreement on reinsurance collateral requirements to 

achieve national uniform treatment of reinsurers. FIO’s desire to 

achieve this uniform treatment is welcome, but at this time, the 

contours of such an agreement are unknown, and FSR requests the 

ability to work with FIO and other stakeholders to ensure that we 

have our input heard. 

Perhaps most importantly, we have to discuss the path forward. 

For the next steps, FSR urges FIO to work with Congress and the 

NAIC to identify this path. We see this FIO report as the first step, 

not an ending in and of itself or the end of the discussion, so it is 

going to be critical that we put in place these next steps and an 

action plan that moves us forward to advance insurance regulatory 

reform. To the extent that Congress agrees with certain recommendations or has its own reforms to advance, FSR recommends 

it work with FIO and NAIC to do so. 

41 

We look forward to being a part of this process, and we appreciate the opportunity to testify today. Thank you. I am happy to 

answer any of your questions. 

[The prepared statement of Mr. Cimino can be found on page 64 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

And now Mr. Ehlert, you are recognized for 5 minutes. 

STATEMENT OF PAUL EHLERT, PRESIDENT, GERMANIA INSURANCE, ON BEHALF OF THE NATIONAL ASSOCIATION OF 

MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. EHLERT. Chairman Neugebauer, Ranking Member Capuano, 

and members of the subcommittee, thank you for this opportunity 

to speak to you today. My name is Paul Ehlert, and I am president 

of the Germania Insurance Companies, a group of property and 

casualty companies that operate in Brenham, Texas. 

Germania only operates across the State of Texas. We employ 

335 people, and we protect 200,000 families and individuals, as 

well as a few small businesses within the State. We have been 

proudly serving our member policyholders and our State for 118 

years. 

I also serve on the board of Directors of the National Association 

of Mutual Insurance Companies (NAMIC). NAMIC represents more 

than 1,400 property and casualty insurance companies, including 

small farm mutuals, State and regional carriers, and large national 

writers. NAMIC members write half of all personal, property, and 

casualty lines and one-third of the commercial business in the 

United States. 

NAMIC believes the FIO report represents a series of conversation starters for potential next steps in insurance regulatory reform, and we appreciate the subcommittee calling this hearing 

today. To begin, the current State-based insurance regulatory system is robust and well-positioned to meet the needs of the Nation’s 

insurance marketplace. However, it is not perfect. 

The FIO report correctly observes that regulation can be too costly and often too complex. And we wholeheartedly share the twin 

goals of maximizing efficiency and uniformity. 

NAMIC appreciates the fact that the FIO report attempted to 

rise above the traditional debate of State versus Federal regulation. While it points to the increased costs of State-based insurance 

regulatory system, it also acknowledges the local nature of many 

insurance products and the cost and complexity of starting up a 

Federal regulatory system. 

FIO concludes that the proper balance is maintenance of the 

State system with Federal involvement in areas where warranted, 

a hybrid approach. In a few targeted areas, this model could work. 

NAMIC supports NARAB II, for example. However, Congress 

should do everything in its power to avoid creating an additive system that simply layers Federal regulation on top of existing State 

regulation. 

The report contains the implicit, but pervasive view that Federal 

involvement will automatically translate into increased regulatory 

efficiency and efficacy. The report suggests that, ‘‘if States fail to 

42 

accomplish the necessary modernizations in the near term, Congress should strongly consider direct Federal involvement.’’ 

With all due respect, it is not at all clear that Federal Government involvement will be a cure for all insurance regulatory ills. 

In general, the report did not go far enough in recognizing some 

of the limitations and potential negative consequences of increased 

Federal involvement. 

One area which does not warrant Federal involvement, contrary 

to the report, is the development of binding, uniform Federal standards to restrict insurers’ use of risk classification factors that are 

already extensively regulated in the States. 

Federal regulation of insurer underwriting practices would simply substitute Congress’ judgment on these matters for those of the 

State. NAMIC believes that FIO’s focus should remain firmly on 

the actions and initiatives at the international level. It is our position that cooperation and coordination internationally is a positive 

thing, but should not result in abdication of regulatory authority to 

foreign jurisdictions and quasi-governmental bodies. 

Too much focus on regulatory equivalence with other nations 

could result in significant and costly changes in the U.S. insurance 

regulatory system. Our system is strong and time-tested. Many of 

the international regulatory principles are theoretical and have 

never been implemented, as in the case of Solvency II. Yet, the 

E.U. is using these principles as a benchmark against which to 

compare other countries. 

We believe that the FIO should be a strong advocate for the U.S. 

system. After all, less than 1 percent of the 2,800 U.S. property and 

casualty insurance companies are internationally active. We urge 

FIO to coordinate with State regulators to advocate for international standards that are consistent with the sound U.S. insurance regulatory approaches and that add value to our member policyholders. 

At a minimum, any international standards must not impose unnecessary burdens for U.S. companies, especially the domestic foreign mutuals like my own. As we move forward, NAMIC stands 

ready to work with Congress on these issues. I again thank you for 

this opportunity to speak, and I look forward to answering your 

questions. 

[The prepared statement of Mr. Ehlert can be found on page 70 

of the appendix.] 

Chairman NEUGEBAUER. I thank the gentleman. 

Mr. Hughes, you are recognized for 5 minutes. 

STATEMENT OF GARY E. HUGHES, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, THE AMERICAN COUNCIL OF 

LIFE INSURERS (ACLI) 

Mr. HUGHES. Chairman Neugebauer, Ranking Member Capuano, 

and members of the subcommittee, I appreciate the opportunity to 

provide you with the views of the American Council of Life Insurers on the FIO report. 

Overall, we believe the report presents a fair and balanced picture of our State-based system of regulation and the various challenges it faces. I would like to focus my remarks today on two 

issues: first, global initiatives affecting the regulation of U.S. life 

43 

insurance companies; and second, capital standards that the Federal Reserve is now required to impose on certain life insurance 

groups. 

The regulatory landscape for U.S. life insurers is changing dramatically. Dodd-Frank now gives the Federal Reserve a significant 

regulatory role with respect to those insurers that are designated 

as systemically important. Two of the ACLI’s member companies 

have received that designation, and one additional company is 

under review for possible designation. Dodd-Frank also gives the 

Federal Reserve jurisdiction over another 12 of our member companies that control savings and loan institutions. 

At the same time, the Financial Stability Board is directing the 

International Association of Insurance Supervisors to develop 

group capital and group supervisory standards applicable to internationally active insurance groups. We estimate that at least 18 of 

our member companies fall into this category. 

Taken together, the initiatives of the Federal Reserve and the 

IAIS will directly affect companies comprising approximately 60 

percent of the premiums of ACLI’s overall membership. Let me put 

that in different terms. In the very near future, a major segment 

of the U.S. insurance business will have material aspects of its capital structure dictated or influenced by someone other than a State 

insurance regulator. 

In addition, 55 of our member companies conduct significant 

business in the United States, but have their ultimate parent located in another country, mostly within the European Union. And 

the E.U. is modernizing its insurance capital standards through 

Solvency II. 

The point here is that life insurance regulation in the United 

States can no longer be viewed as a purely domestic matter. And 

if the capital standards of the States, the Federal Reserve, the 

IAIS, and the E.U. are not generally consistent, the resulting competitive disparities—mainly involving the relative cost of capital— 

will significantly disrupt the U.S. and the global life insurance 

markets. That is why we believe it is imperative for all of our U.S. 

Representatives to work on a unified and constructive basis with 

the FSB and other international standard-setting bodies. 

Various Federal regulatory agencies are now directly involved in 

matters going to the very heart of a life insurer’s financial structure. And while the Federal Reserve and other agencies are making 

a concerted effort to enhance their understanding of our business, 

there is still a significant knowledge gap. We believe the FIO can 

be invaluable in helping fill this gap, given its mission of being the 

Federal repository of information on insurance and its regulation. 

The office is also well-positioned to interact with the NAIC, the 

States, the FSB, the IAIS, and the E.U., as global capital and supervisory standards evolve. It is critical for that evolution to occur 

on a rational and consistent basis, and that will not happen absent 

strong advocacy by the FIO and the States, all working in concert 

and working toward common goals. 

The second issue I want to address involves the holding company 

capital standards Dodd-Frank requires the Federal Reserve to impose on insurers that are designated as SIFIs or that own savings 

and loan associations. 

44 

Any holding company capital requirements made applicable to a 

life insurer must be compatible with the company’s basic business 

model. Unfortunately, the scenario we face due to the Federal Reserve’s interpretation of Dodd-Frank is one of applying a bank-centric regulatory regime to a life insurer. 

The life insurance business is fundamentally different than the 

business of banking. Assets, liabilities, reserves, capital, accounting, products—each of these elements of insurance structure and 

regulation differs significantly from those of commercial banks. 

The issue here is not whether these life insurers should be subject to holding company capital standards. They have accepted the 

fact they will be. The issue is making certain those standards actually work for a life insurer. 

The whole purpose of these provisions of Dodd-Frank is to stabilize the U.S. financial system. Disrupting the operations of wellrun insurance companies by applying ill-fitting standards is fundamentally at odds with that purpose and shouldn’t occur under 

any circumstances. 

I would like to express our appreciation to Congressman Miller 

and Congresswoman McCarthy for introducing H.R. 2140. This 

measure would enable the Federal Reserve to apply appropriate insurance-based capital standards to those life insurers under its jurisdiction. Similar legislation has been introduced in the Senate, 

and we look forward to working with both houses of Congress to 

see this important legislation enacted. 

Mr. Chairman, thank you for holding this hearing, and I would 

be glad to answer any questions. 

[The prepared statement of Mr. Hughes can be found on page 85 

of the appendix.] 

Mr. LUETKEMEYER [presiding]. Thank you, Mr. Hughes. 

Mr. Jensen, you are next. And I would again advise all of the 

panelists today to be sure and pull the microphone as close to you 

as possible. Just take a bite out of it. That is how close it needs 

to be, really, because the acoustics in here are very poor, and we 

want to make sure everybody in the audience has a chance to hear, 

as well. 

So, thank you very much. Mr. Jensen, you may proceed. 

STATEMENT OF JON JENSEN, PRESIDENT, CORRELL INSURANCE GROUP, ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & BROKERS OF AMERICA (IIABA) 

Mr. JENSEN. Thank you, Chairman Neugebauer, Ranking Member Capuano, and members of the subcommittee. My name is Jon 

Jensen, and I am president of Correll Insurance Group, which has 

185 employees and is headquartered in South Carolina. I am also 

chairman of the Government Affairs Committee for the Independent Agents & Brokers of America, also known as the ‘‘Big I.’’ 

The Federal Insurance Office was charged with a massive assignment, and the Big I commends Director McRaith and his staff for 

producing a comprehensive and largely balanced assessment of the 

insurance regulatory system. The report has generated well-deserved attention and analysis and identifies and recommends several areas of reform. 

45 

The recommendations offered in the report suggest that the insurance regulatory system is functioning at a high level and does 

not require significant overhaul and restructuring. The Big I agrees 

strongly with this assessment and several of the recommendations 

in the report, including FIO’s call for the adoption of the NARAB 

II agent licensing legislation. 

While many of the recommendations are worthy of discussion 

and review, I would like today to highlight four of the broader 

themes the Big I found in the report. First, the report reminds us 

that insurance regulations, as with any system of regulatory oversight, are imperfect and can always be enhanced. However, State 

insurance regulation has a strong and successful record and has 

performed particularly well when compared to other financial sectors, especially in recent years. The report reminds us of the success, but also that the system must continue to evolve and improve. 

Second, the Big I believes that the report observes that the establishment of a full-blown Federal regulatory framework is not a 

prudent or viable option. While some expected this recommendation from FIO, the report instead indicates, ‘‘the proper formulation 

for the debate at present is not whether insurance regulation 

should be State or Federal, but whether there are areas in which 

Federal involvement in regulation under the State-based system is 

warranted.’’ 

Third, the recommendations in the report are noticeably modest. 

They reaffirm the relative health of State insurance regulation and 

indicate that sweeping and wholesale changes are unnecessary and 

unwarranted. The report recognizes that State officials have identified and are working to remedy certain flaws within the existing 

system, and many of FIO’s suggestions encourage States to continue their pursuit of existing efforts and note that FIO intends to 

simply monitor their progress. 

Fourth, the report recommends the use of targeted Federal intervention should be limited to those instances where demonstrated 

deficiencies exist and where States are unable as a result of practical hurdles or collective action issues to resolve the challenges 

themselves. 

The report states, ‘‘In all events, Federal involvement should be 

targeted to areas in which that involvement would solve problems 

resulting from the legal and practical limitations of regulations by 

States, such as the need for uniformity or the need for a Federal 

voice in U.S. interactions with international authorities.’’ 

One specific example of such targeted Federal intervention that 

the report recommends is the NARAB II legislation to reform agent 

licensing. Specifically, FIO discusses the need for agent licensing 

reform at length, and we greatly acknowledge and appreciate the 

emphasis given to this issue in this report. 

We are equally appreciative of the leadership of the chairman, 

and of Representative David Scott, who have been steadfast supporters of this legislation over the past several years. In fact, last 

June the NARAB II legislation passed the full House by a vote of 

397–6, and we are also pleased that the measure was approved by 

the full Senate last week. 

The NARAB II proposal is a textbook example of how targeted 

action at the Federal level can enhance and improve State regulaVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
46 

tion without Federal regulation. The Big I is pleased that the 

NARAB II continues its progress through the legislative process, 

and the agent and broker community is optimistic that this muchanticipated measure will be enacted into law in the near future. 

I thank the subcommittee for this opportunity to testify today, 

and I look forward to a continued discussion regarding the issues 

addressed in my testimony. 

[The prepared statement of Mr. Jensen can be found on page 93 

of the appendix.] 

Mr. LUETKEMEYER. Thank you, Mr. Jensen. 

Mr. Nutter, you are next. Please proceed. 

STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, 

REINSURANCE ASSOCIATION OF AMERICA (RAA) 

Mr. NUTTER. Mr. Chairman, and members of the subcommittee, 

I am Franklin Nutter, president of the Reinsurance Association of 

America (RAA). The RAA is the national trade association representing reinsurance companies doing business in the United 

States. RAA members consist of both U.S.- and non-U.S.-based 

companies with an interest in the regulatory environment in which 

they operate, including solvency in financial oversight, as well as 

market access. 

The RAA supported the provision in the Dodd-Frank Act that authorizes the Federal Insurance Office, working with the U.S. Trade 

Representative to enter into covered agreements. This gives those 

governmental entities the authority—indeed, we believe the mandate—to pursue bilateral or multilateral agreements regarding prudential measures with respect to the business of insurance or reinsurance between the United States and one or more foreign governments. These covered agreements will provide uniform regulatory 

criteria for transactions between U.S. and non-U.S. insurers and 

reinsurance. 

Insurance is widely regarded as facilitating economic activity, 

and reinsurance provides insurers with capital support, diversification of risk, and risk transfer for extreme loss events. Covered 

agreements will facilitate the provision of global capital and risktaking capacity and, therefore will benefit economic activity in the 

United States and in other countries. 

We envision these covered agreements to provide the regulatory 

framework for U.S. reinsurers in foreign countries and non-U.S.-reinsurers in the United States. We do not see this as a new layer 

of regulation, but rather as a federally-authorized tool that would 

be applied in the context of their State regulatory system. 

We are pleased to see the Federal Insurance Office report endorse the pursuit of covered agreements. The FIO report defines its 

interest in the context of financial security provided by unauthorized reinsurers based on the NAIC’s recently revised model law and 

credit for reinsurance. The RAA supports the recent NAIC model 

law revisions and has worked vigorously to see them enacted in 

various States. 

It is clear, however, that it will take many years for these 

changes to be adopted by all the States. The NAIC model law process as applied to this model law also assumes the States individually, based on an NAIC-approved list of qualified jurisdictions, 

47 

will make a determination of the equivalence of a foreign country’s 

reinsurance regulation. 

The RAA believes covered agreements, based on Federal statutory and constitutional authority between the United States and 

countries or governmental entities representing major reinsurance 

trading partners, provide the preferred approach for addressing the 

basis of regulatory equivalence and appropriate regulatory security. 

It is clear that the statutory authority in Dodd-Frank does not 

limit covered agreements to matters related to collateral for unauthorized reinsurance. There are a host of Federal prudential issues 

that could be addressed in a covered agreement as the basis upon 

which companies from one jurisdiction do business in the other jurisdiction. 

We recognize the use of this authority beyond collateral may concern some. However, the statute requires a process of review by 

four congressional committees, including this one, the likely involvement of the States with FIO and the USTR in negotiating any 

such agreement, and, finally, implementation within the State regulatory system, not a new Federal system. We think these protections should allay those concerns. 

We believe the European Union under its reinsurance directive 

and Solvency II when implemented has the authority to enter into 

covered agreements. In addition, regulatory and trade officials in 

countries that host major insurance and reinsurance trading partners, including the U.K., Bermuda, Germany, France, Italy, Australia, Japan, and Switzerland have all expressed interest in resolving the issue of cross-border reinsurance relationships. 

The United States is a major attractive market for the global reinsurance industry. The United States is also the home jurisdiction 

for several major reinsurers that operate on a global basis and provide financial security for worldwide insurance markets. A covered 

agreement should and could be tailored to be of mutual value to 

both of these interests. 

We encourage the committee to insist that USTR and Treasury 

move forward on negotiation of one or more covered agreements. 

This committee originated the idea and was right to do so, and we 

look forward to working with the committee, FIO, and USTR to implement this valuable tool. Thank you very much, Mr. Chairman. 

[The prepared statement of Mr. Nutter can be found on page 109 

of the appendix.] 

Mr. LUETKEMEYER. The next witness is Mr. Restrepo. I think 

Mrs. Beatty wants to provide the introduction, so, Mrs. Beatty, you 

are up. 

Mrs. BEATTY. Thank you so much, Mr. Chairman and Mr. Ranking Member. It is certainly an honor for me to not only serve on 

the House Financial Services Committee, but it is not often that 

you get a constituent who has done so much in the area of insurance in your district, so it gives me great pleasure to not only introduce, but to welcome Mr. Robert Restrepo to the committee, and 

I look forward to hearing his testimony today. 

Mr. LUETKEMEYER. Thank you. Mr. Restrepo, you may proceed. 

48 

STATEMENT OF ROBERT RESTREPO, PRESIDENT, CHAIRMAN, 

AND CHIEF EXECUTIVE OFFICER, STATE AUTO INSURANCE 

COMPANIES, ON BEHALF OF THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI) 

Mr. RESTREPO. Thank you, Mr. Chairman and Mr. Ranking 

Member, for inviting PCI to testify today. My name is Bob 

Restrepo, and I am president, chairman, and CEO of the State 

Auto Insurance Companies and chairman of PCI. For nearly a century, State Auto has provided a wide range of protection for consumers and businesses through independent agents and brokers, 

and we employ 2,500 people across the country. 

PCI has more than 1,000 member companies that account for 39 

percent of the premium for the United States home, auto, and business insurance marketplace. My written testimony discusses the 

current regulatory system and how it could be improved. There are 

four key points, though, that I would like to highlight for the committee today. 

The U.S. property and casualty insurance market is the largest 

and most diverse in the world. Our market weathered the financial 

crisis of 2008 better than most federally-regulated sectors, and is 

financially sound, highly competitive, and comprehensively regulated, with a strong consumer focus. 

State regulators are able to respond quickly to local needs and 

realities. Property casualty financial strength and capitalization is 

at a record high, and our regulation and marketplace is constantly 

evolving to meet consumer needs and underserved markets. 

PCI welcomes a better Federal understanding of the challenges 

our marketplace faces, which were described in the FIO report. PCI 

has analyzed each recommendation based on our mission. And we 

asked ourselves, does it promote and protect the viability of a competitive private insurance marketplace for the benefit of consumers 

and insurers? 

Several FIO recommendations could potentially improve our current insurance regulatory system. Among these are its calls for 

more free-market competition in pricing, better coordinated market 

conduct exams, streamlining of commercial lines regulation, better 

disaster risk mitigation, congressional enactment of NARAB II, and 

more standardization of surplus lines rules. 

Recommendations that could harm our market and consumers 

include a federalization of insurance rating factors and pressure to 

adopt bank-like global standards that have not been proven to benefit domestic home, auto, and business insurance consumers or our 

marketplace. 

While the FIO report is an insightful compilation of current regulatory challenges, there are two particular areas where FIO’s leadership would be helpful and consistent with the Dodd-Frank Act 

statutory priorities. First, FIO should play a greater role in establishing meaningful ongoing coordination among all Federal and 

State governmental and private voices in international discussions. 

Second, we need FIO to be a strong advocate for transparency, 

due process, and cost-benefit analysis in all regulatory forums on 

behalf of our marketplace and our consumers. 

In conclusion, I would like to suggest that Congress can consider 

this report in two different ways. If the goal is primarily to encourVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
49 

age the States towards greater efficiency, consistency, and coordination, domestically and internationally, then it should serve a 

useful purpose, considering each recommendation separately. 

To the extent the report becomes a foundation for piecemeal hybrid, Federal-State regulation policy, then the policymakers need to 

be careful of just adding additional layers of supervision, keeping 

in mind the oath that two of my brothers took as doctors of medicine, ‘‘First, do no harm.’’ 

Thank you for the opportunity. 

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

114 of the appendix.] 

Mr. LUETKEMEYER. Thank you, Mr. Restrepo. 

And Mr. Sinder, you are next. You may proceed. Thank you, and 

welcome. 

STATEMENT OF SCOTT SINDER, GENERAL COUNSEL, THE 

COUNCIL OF INSURANCE AGENTS & BROKERS (THE COUNCIL) 

Mr. SINDER. Thank you, Mr. Chairman, Ranking Member Capuano, and members of the subcommittee. My name is Scott Sinder. 

I am a partner at the law firm of Steptoe and Johnson, where I 

chair the government affairs and public policy group, and I also 

serve as the general counsel for the Council of Insurance Agents 

& Brokers, on whose behalf I testify today. 

The Council has about 240 members. They sell or place about 85 

percent of all commercial business insurance in the United States, 

as well as billions of dollars of benefits work, and they also do business abroad. Forty of their members are located abroad, but most 

of their members do work internationally. 

Today, the business of insurance is no longer a local business. It 

is a Statewide business. It is a national business. It is an international business. And that is true on at least three levels. It is 

true for our members who do work in all those areas. It is true for 

their clients who have exposures on all those levels. And it is also 

true from the regulatory perspective as they are subject to regulations at all those levels, both here and abroad. 

Chairman Neugebauer began the hearing by asking what role 

FIO is to play and was sort of critical of the report for not clarifying that. I think you have heard a lot of answers to that, but I 

would answer it directly by saying that I think that the role of FIO 

falls into three buckets. There is the leadership on the international level on the policymaking side. There is the oversight of 

the State system in an effort to spur them to modernize and rationalize and harmonize the regulatory structures. And there is the repository of insurance expertise at the Federal level, which we have 

never had before, and I think is a welcome addition. And in some 

respects, the report does touch on all three of those areas. 

As the report says, it is not so much the question of Federal 

versus State authority, but what are the best ways to rationalize 

and harmonize regulatory oversight of insurance. Mr. Royce commented that he went back and looked at his notes from 2001, and 

he commented on the pace of reform. There is a quote on page 11 

of the report, of which I am particularly fond, that is a quote from 

the very first meeting of the NAIC in 1871, where they said that 

50 

the entire purpose of the NAIC is to create a system of uniform national insurance regulations. 

I would argue that absent Federal oversight and prodding, there 

has been very little progress on that. Even the accreditation project 

and system that Commissioner Leonardi discussed was the outgrowth of the Dingell oversight proceedings in the early 1990s, 

when there was an insolvency crisis in the industry that was also 

cited in the report. And so, we think that FIO can play a very important role in doing that prodding. 

On the international level, we welcome this point of entry and 

effort to try to coalesce around a single voice for the United States. 

We think it is a welcome addition. There is something that is not 

mentioned in the report that we are very focused on as an industry 

at the moment, and that is the Foreign Account Tax Compliance 

Act (FATCA). I think that is a place where the international requirements of the office meet its informational role. FACTA is an 

act that the IRS is intending to apply to the property and casualty 

industry. It is an act that is designed to spur reporting of cash 

value accounts that are maintained by U.S. citizens living abroad. 

By applying it to us, you have a tremendous additional compliance cost with, I would argue, no regulatory bang for your buck. 

And so we are working—and we hope that you will work with us— 

to try to get that limited so FACTA does not apply to the reporting 

of property and casualty insurance premiums, which really are 

completely unrelated to the regime. 

On the domestic side, we would note three things. First of all, 

many of you commented on TRIA, which is only mentioned in the 

footnote in the report. Ranking Member Waters said that she is 

looking for a quick, clean, and long-term resolution to the TRIA 

issues and that time is of the essence. We couldn’t agree more. 

From a policyholder perspective, what is really important is that 

we have the capacity in the market to cover terrorism risks. We 

think that TRIA offers that. Already in the market, you are seeing 

renewals that have riders which say that the terrorism portion of 

the coverage will expire on December 31st, absent extension of the 

program. 

With respect to surplus lines reform, Dodd-Frank included the 

NRRA provisions. We agree with what Director McRaith and FIO 

said in the report about the pace of reform there. We, too, are disappointed that some States are not complying with the same rules 

as the rest of the States, and we would argue that a single State 

taxation regime that most of the States have adopted is the right 

way to go. It is the most efficient. And it is the best, I think, both 

from a regulatory perspective, as well as the regulatee perspective. 

Finally, several folks have mentioned NARAB II. It did pass the 

Senate last week. We thank Chairman Neugebauer and Representative Scott for their leadership in the House on this. This is a bill 

that has passed the House 3 times. It would, I think, both raise 

the standard of regulation of insurance licensure for multi-State licensing and make it much more efficient. Rather than going 

through 56 relatively low bars to get a license, there would just be 

2, your home State regulation and the admission to NARAB, which 

would require a higher level of standards to be satisfied in order 

to be licensed. 

51 

NARAB II has been included in the flood bill in the Senate. We 

urge you to include it as you consider the flood bill when it moves 

back through the House. I am happy to answer any questions, and 

I thank you again for the opportunity to testify. 

[The prepared statement of Mr. Sinder can be found on page 118 

of the appendix.] 

Mr. LUETKEMEYER. Thank you, Mr. Sinder. 

And finally, Mr. Zielezienski, you may proceed. 

STATEMENT OF J. STEPHEN ‘‘STEF’’ ZIELEZIENSKI, SENIOR 

VICE PRESIDENT AND GENERAL COUNSEL, THE AMERICAN 

INSURANCE ASSOCIATION (AIA) 

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

Capuano, and members of the subcommittee. My name is Stef 

Zielezienski, and I am senior vice president and general counsel of 

the American Insurance Association. 

AIA members write property and casualty insurance across the 

country and around the world. Our membership is diverse and includes U.S. insurers that write insurance only within the United 

States, U.S. insurers that write inside and outside the United 

States, and insurers that are U.S. subsidiaries of multinational insurers. As a result, while our focus is on the property and casualty 

lines of business, our perspective is grounded in our diversity. 

AIA strongly supported the establishment of FIO and worked 

with the Congress to create it. We continue to support its mission, 

particularly in helping to promote regulatory advances at home and 

abroad that will improve competitive markets. 

As FIO prepared its report, AIA submitted extensive comments 

that recommended: first, that FIO study the extent to which State 

rate and form regulation undermines competition, decreases consumer choice, and detracts from the goals of financial solvency 

oversight; second, that FIO use the report as an opportunity to 

identify and facilitate uniformity of State regulation; third, that 

FIO vigorously implement its Dodd-Frank responsibilities, take a 

leadership role for the United States on international regulatory 

modernization initiatives and work with States, the NAIC, and 

Federal financial regulators to present a single, unified U.S. voice 

to preserve U.S. competitiveness and to promote sound regulatory 

policy. 

We are pleased that the report advances our three recommendations. With regard to rate regulation, FIO acknowledges the evidence that personal lines rate regulation has been counterproductive and calls for the States to identify rate regulatory practices that best foster competitive markets. 

At the same time, however, the report contemplates the adoption 

of uniform Federal standards for use of risk assessment tools. Further regulation of a company’s use of risk classification assessment 

is nothing more than rate regulation by another name. If insurance 

rate regulation is harmful, it should be jettisoned in favor of competitive pricing and not be reintroduced in the form of national risk 

classification standards. 

On the issue of government product regulation, AIA concurs with 

FIO’s call to the States to ‘‘streamline and improve the regulation 

of commercial products.’’ Establishing or broadening the interstate 

52 

compact to encompass commercial lines policy forms is a recommendation worth exploring, particularly if it leads to a shorter 

timeline for the introduction of new commercial policy forms into 

the marketplace. 

AIA also supports FIO’s call for increased uniformity in State 

market conduct examination standards and for establishing requirements for contract examiners, assuming, of course, that the 

standards themselves recognize the benefits of diverse business 

plans among insurers. 

Finally, it is critically important that FIO carry out its important 

Dodd-Frank mission for enhancing the prudential supervision of insurers internationally and to work together with the NAIC, States, 

and Federal financial services agencies to present a unified U.S. 

perspective. 

While FIO has a clear role on international prudential matters 

and initiatives, it also participates domestically with the State regulatory representative as an adviser to the Financial Stability 

Oversight Council and makes recommendations regarding potential 

insurer designations to the Council. 

It is therefore imperative that the U.S. contingent coordinate 

both here and abroad on policy matters that may shape the future 

of U.S. insurance regulation. Our perspective is grounded in the recent financial crisis and the ongoing implementation of DoddFrank. As a result of these events, insurers must manage their 

businesses in a turbulent, tripartite environment involving the 

States, the Federal Government, and our international trade partners. 

Capital standards for insurers, systemic risk oversight, accounting principles, and group-wide supervision are the tip of the iceberg, but hardly the whole iceberg itself. In carrying out these discussions in each of the three regulatory environments, FIO must 

be careful to advance a consistent and balanced position that removes barriers to U.S. competitiveness, while at the same time preserving the domestic laws and regulations that currently work for 

insurers and consumers. 

That is certainly easier said than done due to the existing statutory limitations that apply to FIO’s role in developing, negotiating, 

and implementing any new rules. But FIO’s role is no less crucial 

even with those limitations in place. The stakes are high, and we 

must all pull in the same direction to get it right. 

Thank you very much. 

[The prepared statement of Mr. Zielezienski can be found on 

page 134 of the appendix.] 

Mr. LUETKEMEYER. Thank you, Mr. Zielezienski. I appreciate 

your testimony. 

We have votes called, I understand, about 1:10. So with that in 

mind, I am going to defer my questions to the end. I think Mr. 

Capuano has done the same. And we are going to go to Mr. Stivers, 

the gentlemen from Ohio, to begin the questions. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate that. 

My first question is for Mr. Hughes. It was alluded to in Director 

McRaith’s report, but can you talk about the benefit of the interstate compact to life and health companies that happen to have hoVerDate Nov 24 2008 18:53 Sep 25, 2014 Jkt 088523 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\88523.TXT TERRI
53 

mogenous risk, as far as benefit to customers of products being able 

to make it to market sooner and things like that? 

Mr. HUGHES. I would be glad to. The compact has certainly been 

a very positive step forward for State regulators. One of the frustrations that we have had over the years is in product approval. 

The timing really works against us. We have been a big supporter 

of the compact, but a bit frustrated that large States like New York 

and California, after a number of years, still haven’t gotten on 

board with it. 

Mr. STIVERS. That is unfortunate. I was the sponsor in Ohio. We 

are proud to be members of it. But some of the big States have not 

joined. 

Mr. HUGHES. They have not. 

Mr. STIVERS. And that is one of the problems, but it certainly has 

streamlined things and made life easier for your customers and 

people who want to buy life insurance. Is that correct? 

Mr. HUGHES. It has, indeed. 

Mr. STIVERS. Great. My follow-up to that is for Mr. Restrepo. So 

given that property and casualty insurance does not have homogenous risk—in fact, it has very heterogeneous risk—are there things 

that can be done where the States come together, much like they 

did in the interstate compact for life and health? Because certainly 

I live in Ohio, like you do. And, by the way, your company is in 

Joyce Beatty’s district now, but you were in my district for a couple 

of years, and it is a great company, but you guys insure a lot of 

very different risks. 

I don’t want our customers in Ohio paying for coastal exposure 

in Florida. So are there other things we can do inside property and 

casualty, inside the State-based system that might benefit customers in the way that the compact has for—or for life and health? 

Mr. RESTREPO. Both as an industry and as a company, we continue to work with the local State regulators to have pricing and 

products in place that recognize the realities of those local marketplaces. And as you say, Ohio is very different than Florida and requires different solutions, and Florida requires different solutions. 

So working within the existing system, we have significantly improved our pricing precision, with much more sophisticated pricing. 

When I started in the business 40 years ago, there were just a couple of price options for homeowners. Now, there are thousands. And 

there are probably more price points for auto insurance in this 

country than there are drivers. 

Mr. STIVERS. And markets like Ohio and— 

Mr. RESTREPO. Much more sophisticated. 

Mr. STIVERS. —Illinois that allow you to price your product in 

what— 

Mr. RESTREPO. The regulatory system in Illinois really promotes 

competition. New carriers want to be there, want to compete. It is 

a very competitive marketplace. 

Mr. STIVERS. Thank you. The follow-up I have to that is, since 

now all of you are regulated by—or could be regulated by Federal 

entities, the Fed and others, from your perspective—and anybody 

can answer this—I asked Director McRaith whether there was true 

coordination between the FIO, the Fed, and the SEC, with regard 

to having a singular voice both domestically and internationally. 

54 

He does a few conference calls, which I certainly appreciate, but I 

am not sure I feel comfortable that there is a process in place to 

really create a singular voice, because when there is a disagreement, who wins? And I don’t think we know that yet. 

Does anybody have an opinion on that? And I only have a minute 

and 22 seconds left, so I will take it to volunteers. Mr. Nutter? 

Mr. NUTTER. Mr. Stivers, a comment that we would make is that 

with the introduction of the Federal Reserve into this process and 

the driver being the Financial Stability Board at the IAIS, I must 

admit, for many of us, it has become much more opaque about how 

you engage those regulators or whether or not at the Financial Stability Board there is really insurance expertise that is represented 

there. So there is— 

Mr. STIVERS. Clearly not as a voting member. And you make that 

point very well. And I think that—let me ask just a yes-or-no question. Are there any of you who believe that we would benefit from 

a much more clear process as to how we create a singular voice, 

both domestically and internationally? Do you think we would benefit from a better process? Raise your hand if you think so. 

Mr. HUGHES. Absolutely, yes. 

Mr. STIVERS. Does anybody disagree with that statement? Great, 

thank you. I think that is really the heart of where I think we need 

to go, because several of you made this point very, very well about 

how overlapping and conflicting regulation could really hurt our 

competitiveness. I am also very worried that a lot of the Europeans 

and international folks have a singular voice and we do not. And 

we also have a dominant share of the insurance market, and it 

could really put our American companies that want to do business 

internationally at a huge competitive disadvantage, if the structure 

is built around a foreign model. 

And so, thank you for being here. Thanks for what you guys do. 

I had a very brief time to ask questions, but I appreciate those of 

you who responded. Thanks for being here, Mr. Restrepo. 

Mr. LUETKEMEYER. I thank the gentleman. We will now go to the 

gentlelady from Ohio, Mrs. Beatty. 

Mrs. BEATTY. Thank you, Mr. Chairman, and Mr. Ranking Member. We have heard a lot about capital standards this afternoon. 

Mr. Hughes, if our goal is to have the best prudential supervision 

and the most effective regulation of the financial services industry, 

does it make sense to apply bank capital standards to insurance 

companies? And would it make more sense to apply insurancebased standards to insurance companies? 

Mr. HUGHES. We feel very strongly that the only standards that 

ought to be applied to an insurance enterprise are insurance-based 

standards. And that has been our great frustration at the moment 

with the Federal Reserve’s interpretation of Dodd-Frank, which is 

sending us in the other direction. I know you have had discussions 

with some of your constituents on that point, and we are working 

very hard with this body and the Senate to see if we can correct 

that. 

Mrs. BEATTY. Thank you. Let me ask one other question. As I 

was reading, Mr. Restrepo, in your testimony, let me, first, thank 

you for the statement about the questions that we should be asking, best standards for good regulation and good regulators, and 

55 

where can the current system be improved. That is a great starting 

point, I think, for me. What is it that we can do? 

So hearing your testimony from all of you today is very helpful. 

But my question to you, Mr. Restrepo, is, if the Federal Reserve 

proposes a bank capital standard for insurance companies under 

supervision, while the State insurance regulators enforce an insurance standard, are you concerned about any confusion and uncertainty that could result from that? 

Mr. RESTREPO. I am very much concerned. You could rapidly go 

from a hybrid structure to a hydra structure, with multiple heads 

you are dealing with, and multiple heads will certainly confuse the 

marketplace. 

We are a very strong industry and really don’t need the kind of 

standards—certainly the single standards that are being talked 

about. It is a diverse industry. We all have different risk profiles, 

different capital requirements, and those solutions—or those issues 

are best addressed locally. 

Mrs. BEATTY. With that—and from hybrid to hydra—is it plausible that there could arise a situation in which two different regulators are trying to enforce two different incompatible standards on 

the same company? 

Mr. RESTREPO. No question. 

Mrs. BEATTY. Okay. 

Mr. RESTREPO. In fact, that is bound to happen. 

Mrs. BEATTY. Thank you. That was very helpful. And I yield back 

my time, Mr. Chairman. 

Mr. LUETKEMEYER. Okay. Next, we have the ranking member of 

the subcommittee, the gentleman from Massachusetts, the Boston 

Red Sox’s greatest fan here in the Capitol, Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

While the gentlelady from Ohio is here, based on your early 

questions, I do—there are some misinformed people in America 

who wouldn’t mind if Ohio State’s football program shut down. I 

am not one of them, of course, but there are those who might be— 

not, of course— 

Mrs. BEATTY. Am I supposed to say thank you to that or am I 

supposed to pause, Mr. Chairman? 

Mr. LUETKEMEYER. Remember, he is the ranking member. 

Mrs. BEATTY. Then, thank you. 

Mr. CAPUANO. Yes, big job. 

First of all, gentlemen, thank you all very much for being here 

and putting up with all this. And, by the way, is there anybody in 

the audience who has not testified who would like to, because—as 

I said earlier, this is an interesting discussion. And I am tempted— 

I don’t—I didn’t hear anybody who actually said that you would 

rather have the Fed doing this than FIO. I just want to be clear 

that I didn’t hear anybody say that. Did you? Good, because this 

was part of the discussion we had when we did Dodd-Frank. If we 

didn’t do something like this, the Fed or somebody in the banking 

industry would step in and do it. It was either something like this 

or banking regulators doing it. 

And I think all of us agree that banking regulators are fine and 

wonderful people in banking issues. And they may have some interest in some of the things that some of you companies do, but in 

56 

general, insurance is a different animal and deserves different 

treatment. And that is what this was all about. 

I am tempted, to be perfectly honest, to ask each of you whether 

you think that any individual company who wished to have an optional Federal charter should be able to do so, but because I respect 

you all and don’t want to position you too much, I won’t do that. 

But that is a discussion for another time. 

I think that a lot of the things that you have said and others 

have said argue strongly in favor of allowing a company—if they 

so choose—and allowing companies to choose not to, to do it— 

again, similar to what banking does. There are banks that have 

chosen to do State charters, and there are banks that have chosen 

to do Federal charters, but that is a different issue. 

I am, however, interested, because we will have this discussion. 

There are some of my colleagues here who hate the concept that 

FIO even exists. They hate the concept of them even asking questions and trying to put a focus on this discussion. And for my purposes, I would like to ask each of you, if you had a choice, if I made 

you emperor of the universe, and you could unilaterally make this 

decision, now, you only have two choices here. I am not going to 

give you multiple choices, because that gets too complicated, and 

I don’t have that choice. I get to vote red or green, so you may as 

well vote red or green. 

If your choice was to keep FIO as it is, pretty much with its authority or limited authority as it is, to have these discussions, 

would you repeal it outright? Would you repeal it? Or would you 

keep it as is? And, Mr. Cimino, I may as well start with you. 

Mr. CIMINO. Yes, we would support a strong, effective FIO as it 

currently stands. 

Mr. CAPUANO. Mr. Ehlert? 

Mr. EHLERT. I think FIO definitely has a role in the international market. And we would support FIO in that market, as 

well. 

Mr. CAPUANO. Mr. Hughes? 

Mr. HUGHES. We absolutely support FIO. 

Mr. CAPUANO. Mr. Jensen? 

Mr. JENSEN. FIO as it stands. 

Mr. CAPUANO. Mr. Nutter? 

Mr. NUTTER. FIO, yes, with the authority they have for covered 

agreements in particular. 

Mr. CAPUANO. Mr. Restrepo? 

Mr. RESTREPO. FIO as it is. 

Mr. CAPUANO. Mr. Sinder? 

Mr. SINDER. We have been big supporters of FIO since day one. 

Mr. CAPUANO. Mr. Zielezienski? 

Mr. ZIELEZIENSKI. Yes, we support FIO, and believe it has a crucial international role. 

Mr. CAPUANO. That is all I wanted to hear, because to be perfectly honest, we will continue this discussion about how—because, 

again, as I said earlier—I am sure you all hear me—I do believe 

that slowly but surely over time we are going to come to a more 

federalized system. I don’t think we will ever get to a fully federalized system. I don’t even think I really want that. 

57 

But I think we are going to go that way. We have already started. You know that as well as I do. It is inevitable, and with your 

help, we will be able to get there in a thoughtful way as opposed 

to a fits and starts way. 

My hope is that it gets done absent the financial crisis. We all 

know that financial crises—and there will be another one someday, 

hopefully not in my lifetime, but there will be—don’t always result 

in the best reaction by Congress. I think things are better done in 

a thoughtful manner, and my hope is that FIO allows us or encourages us to have this discussion as we move forward, and I hope 

that you all participate in that. And again, thank you for what you 

have done here today. 

Mr. LUETKEMEYER. I thank the gentleman. And you notice today 

so far that our panel has had some softball questions from us. We 

recognize you have us outnumbered, so we are going to behave ourselves. 

And with that, we go to the gentleman from California, if he is 

ready, Mr. Royce. 

Mr. ROYCE. I want to thank Mr. Sinder for his statement on the 

IRS move to issue supplemental regulations, implementing FATCA. 

Non-cash-value insurance products are not vehicles for tax evasion 

and should not be treated as such. I have mentioned this issue to 

the FIO and to the Treasury. And I would like to work with you 

to ensure that the reporting requirements do not apply to these 

products. 

But I am sure many of you attend NAIC meetings on a regular 

basis, and I did want to ask you a question, Mr. Hughes. I was 

hoping you could comment on whether NAIC committees and subcommittees all always follow the open meetings policy mentioned 

in my questioning to the first panel, and specifically, if you or a 

member of your trade participated in the executive committee 

meeting via conference call on October 25th regarding the master 

death file, and do you feel that meeting was open? And I would ask 

if any others would care to comment? 

Mr. HUGHES. You put your finger on an issue that is significant 

to us. The role of the NAIC has grown substantially over the years, 

and governance has not kept pace with it. So we are very strong 

believers that the NAIC needs to have due process and accountability. The things it is doing today, whether you are talking about 

open meetings or pushing for accreditation standards that essentially have the force and effect of law, we think it is imperative 

that the NAIC do something along the lines of what you would 

have in any State, which is your administrative due process statute. So we are very strong proponents of engaging the NAIC in a 

constructive discussion on how to improve governance. 

Mr. ROYCE. I think transparency is important and it is done at 

the State level. And it is not done here. The other question, Mr. 

Hughes, and I would ask you and others if you could please outline 

in your view what the costs are to consumers of the lack of uniformity in State insurance regulation, because I remember well the 

original quote by the original NAIC Commissioner back in the late 

1800s about the ideal of having for the consumer—having uniform 

regulation everywhere. 

58 

That was the original goal. That goal has never been achieved. 

What about the costs to the consumer as a consequence? 

Mr. HUGHES. From our perspective, the costs are significant, and 

they are passed along in our pricing to consumers. You may recall 

that former FDIC Chair Sheila Bair did a study some years ago 

that analyzed this, and reached the same conclusion that McKinsey 

did, that there are substantial cost savings that could be realized 

if the system were uniform from one jurisdiction to another. 

Mr. ROYCE. Let me ask Mr. Sinder that same question, should 

he want to comment on it. 

Mr. SINDER. I agree completely. One of the issues is, at some 

level, the NAIC is a confederacy. No one is bound by the model 

rules that they issue. And so without the Federal pressure, it is 

harder for them to achieve a harmonious, uniform result. 

Mr. ROYCE. Mr. Cimino, would you like to comment on that, as 

well? 

Mr. CIMINO. Yes, I would be happy to. Thank you for the question. Given the patchwork system we have in place here, we ultimately have companies that aren’t able to necessarily offer products throughout the Nation. And so even though there might be 

model laws in place, States may adopt them in some form of derivative, so ultimately it raises barriers and increases costs. 

So not only are consumers not able to necessarily purchase the 

products that might suit their needs, but it ultimately raises barriers, which forces out competitors in the marketplace. And it is 

that competitive pressure that lowers the prices and ultimately 

serves those consumers. 

Mr. ROYCE. So, you have both factors. Would you hazard a guess 

in terms of what the costs are to the consumer, in terms of the first 

aspect of the lack of uniformity? 

Mr. CIMINO. I don’t know if I could quantify that cost for you, sir. 

Mr. ROYCE. Yes, sir? 

Mr. ZIELEZIENSKI. There are certainly costs of non-uniformity. 

But I would like to point out that even if it is uniform, there is inconsistent application. And let’s just talk about product review for 

a minute. 

I remember doing an internal survey of AIA member companies 

probably about a decade ago to try to determine how long it took 

to get a product to market. And what I learned was there are costs 

associated with such a lengthy product approval delay that the 

product never made it to market. 

So not only are there costs to consumers, but there are costs to 

consumers of not having the product option even available because 

the time it takes to review it and approve it at the State level is 

not worth the investment for the company. 

Mr. ROYCE. It is interesting. If you go back to the McCarran-Ferguson decision, the decision also said that insurance is interstate 

commerce, right? It is part of the decision. And if you go back to 

the original reason we gave up on the Articles of Confederation, 

maybe some of the confederates in Congress would still argue this 

point, but the reason we have an interstate commerce clause is because of what was happening between the States with respect to 

barriers of entry. 

59 

And it became very clear to the architects of this republic that 

the reason it didn’t work was because we hadn’t created a national 

market. Instead, we had these tariffs, these barriers to entry at 

every State border, and the consumers were the losers for it. 

So the concept behind our system of federalism was that we 

would establish one market in the United States, and we are still 

struggling with the fact that, with respect to insurance, we have 

built in a great disadvantage for our consumers because of these 

barrier to entry problems which create then something of a lack of 

competition on one hand. You don’t have the efficiencies that would 

come from a national market driving down prices. And it is time 

we, I think, have a paradigm shift in terms of how we view this 

and how we come together in order to get some of these economies 

of scale and a more competitive market for insurance to benefit our 

consumers. 

Thank you very much, Mr. Chairman. I appreciate the time. 

Mr. LUETKEMEYER. Thank you. We have a few statements that 

we need to add to the record here: the National Conference of Insurance Legislators; the American Academy of Actuaries; the National Association of Professional Surplus Lines Offices; Lloyds of 

London; and the Insured Retirement Institute. 

Without objection, it is so ordered. 

And let me just wrap up here with a few remarks and a couple 

of questions. I think that we have—from the discussion today— 

seen that FIO’s role is still one of evolving into something that we 

hope will be a benefit to the industry. All of you have made comments with respect to, we would like to see them in their role of 

protecting our interest internationally, of staying in that role. 

And I would just add that you all are in a position to really push 

the agenda and push back on things. And I would hope that you 

would encourage them to be leading when it comes time to do 

something on the international level, from the standpoint—we are 

the big boys on the block. Why do we have to follow what Europe 

does or whoever else? Let them follow us. We need to be leading 

this situation and not allow our industries and our markets to be 

harmed by something internationally, if we don’t like it, then they 

can conform to us. That would be my suggestion. 

From the standpoint of what goes on within our own country 

here, it has been said most of you don’t like the capital standard 

suggestion from the international folks. A couple of you have made 

mention of the fact that you—the risk classification standards are 

something that they need to stay away from. 

And I guess my question would be, what is your plan of action 

against pushing back on areas where you believe that they don’t 

need to be involved, or they seem to make suggestions that they 

may get involved in? Do you have a plan of action to do that, Mr. 

Cimino? 

Mr. CIMINO. I think it goes to the question that Mr. Stivers was 

talking a bit about, which is, how do we better coordinate this to 

make sure we have a unified voice? And I think that most of the 

folks up on this panel are working hard— 

Mr. LUETKEMEYER. It is a pretty unified voice from where I am 

sitting here, with all of you today. I am just—there needs to be 

some sort of a coordinated plan. I hope that there is one there. 

60 

There is this sense I get that you are coordinated, that you are unified, and that you will work with these folks and push back on 

areas where you believe that they will be encroaching. 

Mr. Hughes in particular, you have some interesting areas where 

you like what they do, and other areas where you are very concerned about some of the things they do. 

Mr. HUGHES. Yes, and I think that the watchword for us is really 

‘‘consistency.’’ 

Mr. LUETKEMEYER. Yes. 

Mr. HUGHES. And I think it is incumbent upon the United 

States—if the world would coalesce around us, I think that would 

be wonderful. We did weather the crises well, but I think what we 

have to do is have the FIO, the States, the Federal Reserve, and 

anybody else that is a stakeholder in this, advocating on the same 

page with the same message with these international bodies. At 

the end of the day, we hope that we have that consistency globally 

that we need and that it doesn’t upset our system of regulation. 

Mr. LUETKEMEYER. As somebody who was in the business for 35 

years, it always gives me some trepidation when I see the Federal 

Government start to get their nose in the tent. Seeing what has 

happened here over the last several years, it seems like once the 

nose is in the tent, the Federal Government never goes away. You 

have to put up with it from then on. 

Mr. Sinder, you had a couple of comments with regards to TRIA 

that I was kind of curious about. Your group deals with it probably 

more than the rest of these folks, and I was curious, has the fact 

that we haven’t addressed TRIA as a Congress yet started to affect 

your members and their ability to not only sell their product, but 

their clients and their ability to do their business? 

Mr. SINDER. Yes, sir, it has. It affects their clients. We are already seeing—for renewals that are coming up now that aren’t 

aligned with the calendar year, there are riders on the policies that 

say the terrorism coverage will expire on December 31st absent extension of the TRIA program. So we are already seeing it. You have 

policyholders who are buying partial coverage because they can’t 

get the rest. 

Mr. LUETKEMEYER. And, Mr. Hughes, you talked about covered 

agreements. That is where—I want to go to, I think, Mr. Nutter. 

Can you give me just a little background on that really quick, exactly what you are talking about and how FIO can be impactful for 

you? 

Mr. NUTTER. You asked a question a minute ago about a plan in 

dealing with concerns about European-driven capital standards. 

The Congress included in the Dodd-Frank Act the authority for 

FIO to enter into covered agreements, so think of them as treaties, 

not subject to Senate approval, but subject to a whole host of 

checks and balances, including review by this committee, the 

House Ways and Means Committee, and the Senate Banking and 

Senate Finance Committees, both when they are initiated during 

the course of them, and then when they are concluded, as well as 

the involvement of the NAIC or the Commissioners in that process. 

It clearly is a way to deal with the mutuality that you would 

want between regulatory officials both in the E.U., in Bermuda and 

Switzerland, and other major trading partners. So it does seem to 

61 

be the one operating authority that FIO has that can deal with 

issues beyond the narrow issue that is often characterized as dealing with collateral or security on reinsurance transactions. 

Mr. LUETKEMEYER. Very good. With that, I am finished with my 

questions. I think the panel is also finished. I would like to thank 

each of you for being here today. I appreciate your testimony. It 

has been very insightful. While we didn’t have, perhaps, as many 

people here as you may have thought, your testimony is extremely 

important from the standpoint of drawing conclusions from what 

your industry believes is important, what you want us to focus on, 

and your priorities so that we can work with you to try and come 

up with some good solutions here. 

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

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

materials to the Chair for inclusion in the record. 

And without objection, this hearing is adjourned. 

[Whereupon, at 1:14 p.m., the hearing was adjourned.] 

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