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[Senate Hearing 114-98]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 114-98

 
     THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE REGULATIONS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE UNIQUE ASPECTS OF THE INSURANCE INDUSTRY, THE DEVELOPMENT 
 AND IMPLICATIONS OF DOMESTIC AND INTERNATIONAL CAPITAL STANDARDS, AND 
EVALUATE THE CURRENT STATE OF INSURANCE REGULATION IN THE UNITED STATES 
                               AND ABROAD

                               __________

                             APRIL 28, 2015

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban Affairs
  
  
  
  
  
  
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_________________________________________________________________________________
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

MICHAEL CRAPO, Idaho                 SHERROD BROWN, Ohio
BOB CORKER, Tennessee                JACK REED, Rhode Island
DAVID VITTER, Louisiana              CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania      ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois                  JON TESTER, Montana
DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
TIM SCOTT, South Carolina            JEFF MERKLEY, Oregon
BEN SASSE, Nebraska                  ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas                 HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota            JOE DONNELLY, Indiana
JERRY MORAN, Kansas

           William D. Duhnke III, Staff Director and Counsel

                 Mark Powden, Democratic Staff Director

                 Chad Davis, Professional Staff Member

                Shelby Begany, Professional Staff Member

            Laura Swanson, Democratic Deputy Staff Director

                Graham Steele, Democratic Chief Counsel

             Megan Cheney, Democratic Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                      Troy Cornell, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
                                  
                                  
                                  

                            C O N T E N T S

                              ----------                              

                        TUESDAY, APRIL 28, 2015

                                                                   Page

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

Opening statements, comments, or prepared statements of:
    Senator Brown................................................     2

                               WITNESSES

S. Roy Woodall, Jr., Independent Member with Insurance Expertise, 
  Financial Stability Oversight Council..........................     4
    Prepared statement...........................................    25
    Responses to written questions of:
        Senator Vitter...........................................    40
        Senator Toomey...........................................    40
Mark E. Van Der Weide, Deputy Director, Division of Banking 
  Supervision and Regulation, Board of Governors of the Federal 
  Reserve........................................................     6
    Prepared statement...........................................    28
Michael McRaith, Director, Federal Insurance Office, Department 
  of the Treasury................................................     7
    Prepared statement...........................................    30
    Responses to written questions of:
        Senator Vitter...........................................    41
        Senator Toomey...........................................    42
Kevin M. McCarty, Commissioner, Florida Office of Insurance 
  Regulation, on behalf of the National Association of Insurance 
  Commissioners..................................................     9
    Prepared statement...........................................    36
    Responses to written questions of:
        Senator Vitter...........................................    43
        Senator Toomey...........................................    43
        Senator Heller...........................................    45

              Additional Material Supplied for the Record

Letter from Benjamin M. Lawsky, Superintendant of Financial 
  Services, New York State Department of Financial Services, 
  submitted by Senator Brown.....................................    46
Examples of Incentives for Annuity Brokers, submitted by Senator 
  Warren.........................................................    49

                                 (iii)

     THE STATE OF THE INSURANCE INDUSTRY AND INSURANCE REGULATIONS

                              ----------                              

                        TUESDAY, APRIL 28, 2015

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Richard Shelby, Chairman of the 
Committee, presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    Today the Committee will examine several issues of 
importance to the insurance industry both domestically and 
internationally.
    Dodd-Frank drastically altered the regulatory landscape for 
insurers. It imposed a Federal regulatory framework on some 
insurers, despite a clear exemption that exists under the 1945 
McCarran-Ferguson Act.
    As a result, current law subjects certain insurance 
companies to regulatory requirements similar to those for 
banks. And while supporters of the existing regime claim that 
the law provides enough flexibility to account for differences 
between banks and insurers, many critics believe that it does 
not.
    As a liability-driven business, insurance often has long-
term cash-flow patterns compared to shorter-term activities at 
banks. Consequently, current law fails, I believe, to 
adequately account for the business model and risk profile of 
insurance companies, and that should concern us all.
    Last Congress, we passed the so-called Collins fix to make 
clear that the Federal Reserve has the flexibility to structure 
capital standards for insurers based on their unique nature. 
Initially, the Federal Reserve proposed capital standards that, 
if applied to insurers, would have been all too similar to the 
capital standards for banks.
    Recognizing this to be a mistake, the Federal Reserve then 
initiated a Quantitative Impact Study, or QIS, to better 
understand how to design a capital framework for the insurance 
holding companies that it supervises. I welcomed this 
development as I have always believed that a strong empirical 
analysis should inform our regulatory rulemaking process.
    It would be unfortunate, I believe, if the Fed uses the QIS 
process solely to buy time for international insurance capital 
standards to be developed and subsequently adopted here in the 
U.S. An international regulatory regime, I believe, should not 
dictate how U.S. regulators supervise American or U.S.-based 
companies.
    For example, decisions made at the Financial Stability 
Board, or FSB, have been adopted in the U.S. by the FSOC with 
what appears to be little independent evaluation. I have 
publicly expressed my concerns with both the FSB and the FSOC 
processes.
    The FSB, remember, is not a U.S. regulator, and it is not 
accountable to Congress or the American people. Therefore, the 
FSOC should not merely be a rubber stamp for the decisions made 
by an unaccountable international body like the FSB.
    The Treasury Secretary, who also chairs the FSOC, has told 
this Committee that the FSB's decisions do not bind the FSOC. 
The FSOC's recent actions, however, leave us to wonder if some 
of the FSOC members agree with Secretary Lew on this point.
    When it comes to insurance, our regulators should 
acknowledge that the U.S. insurance industry is structured and 
operates differently than its European counterparts. Our 
representatives to these international discussions must ensure 
that their positions, and especially any resulting agreements, 
recognize these differences and do not disadvantage U.S. 
companies. The insurance industry has traditionally weathered 
economic downturns relatively well, and the State-based 
regulatory framework generally works to protect policyholders.
    Today's panel will help us better understand the unique 
nature of insurance, and hopefully shed light on how to 
appropriately take into account the differences between banking 
and insurance. The Committee can then consider whether any 
changes need to be made to current law.
    Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman. Thank you to the 
four witnesses today for joining us. Insurance matters to my 
State. In addition to the millions of insurance consumers in 
Ohio, the city of Columbus is second in the Nation in 
concentration of insurance jobs behind only Hartford.
    Insurance became an area of great concern to all of us in 
2008 when the near failure and bailout of insurance giant AIG 
was a central event in the financial crisis, as we know. AIG 
realized 40 percent of the loss--45 percent of the losses of 
all insurance in 2008 and received 55 percent of the 
Government's support provided to insurers.
    Dodd-Frank contains a number of provisions to prevent 
another AIG from happening again, including: creating FSOC, a 
single entity responsible for examining risks facing our entire 
financial system; identifying systemic financial firms and 
encouraging the regulation of risky activities; regulating 
derivatives, including credit default swaps, eliminating the 
Office of Thrift Supervision; moving thrift regulation to the 
Federal Reserve; creating nonbank systemically important 
financial institution designations; and requiring enhanced 
capital and leverage rules for nonbank SIFIs, including 
insurance companies.
    Few laws, of course, are perfect. Last year, Congress 
passed and the President signed into law legislation that 
Senator Collins, Senator Johanns, and I introduced to address a 
specific unintended consequence of Section 171 of Dodd-Frank, 
known as the Collins amendment. The Insurance Capital Standards 
Clarification Act allowed the Fed to tailor capital rules to 
the insurance business model. I look forward to hearing about 
the Fed's ongoing implementation of that legislation, how it 
plans to design capital requirements for savings and loan 
holding companies and nonbank SIFIs.
    I also look forward to hearing about international 
developments, as the Chairman mentioned. In order for our 
insurance companies small and large to succeed, all of our 
witnesses today need to be working together on international 
insurance issues.
    Finally, I am interested in hearing about how State and 
Federal regulators are identifying and addressing emerging 
risks in the insurance markets, including captive reinsurance, 
private equity ownership, and reaching for yield.
    You all have seats on FSOC where identifying emerging risks 
is part of preventing the next financial crisis. While I 
believe that traditional insurance is obviously a distinct 
business from banking and should be treated as such, it is 
important to remember, though, that institutions often condone 
regulated activities in so-called shadow banking. Special 
purpose vehicles, SPVs, that played a significant role in the 
financial crisis seem to be making their way back into the 
insurance market. And we know that insurers can engage in a 
wide range of activities from derivatives to securities 
lending.
    As we move further and further away from 2008, we cannot 
forget what happened. We should not take our eyes off potential 
sources of risk to policyholders and more broadly to the 
financial system. Each of our witnesses today plays an 
important role in the regulatory framework for insurance 
companies. I look forward to each of your perspectives on 
domestic and international issues.
    Thank you.
    Chairman Shelby. Thank you, Senator Brown.
    First we will hear from the Honorable Roy Woodall, who 
currently serves as the Independent Member with Insurance 
Expertise on the Financial Stability Oversight Council.
    Next we have Mr. Mark Van Der Weide from the Federal 
Reserve. He serves as the Deputy Director of the Division of 
Banking Supervision and Regulation, under which regulation of 
the insurance industry currently falls.
    Third we will hear from Mr. Michael McRaith, the Director 
of the Federal Insurance Office.
    And, finally, we will hear from Mr. Kevin McCarty, 
Commissioner of the Florida Office of Insurance Regulation, who 
will today testify on behalf of the National Association of 
Insurance Commissioners, of which he is a former president and 
has worked closely with on international insurance issues.
    All of your written testimony will be made part of the 
hearing record. Mr. Woodall, we will start with you, if you 
will sum up your remarks. Welcome.

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

    Mr. Woodall. Thank you, Chairman Shelby, Ranking Member 
Brown, and Members of the Committee, for inviting me to appear 
before you today. This is my second appearance before the 
Committee, and I truly appreciate the opportunity to share my 
thoughts with you on this important topic.
    After a career in the insurance sector and its regulation 
that began in 1961, I was asked in 2002 to assist the 
Department of the Treasury for 1 year with the implementation 
of the Terrorism Risk Insurance Act, but I ended up staying for 
8 years, during Republican and Democratic administrations, and 
serving under four different Treasury Secretaries.
    While at Treasury, my insurance portfolio was broad, but a 
recurring theme was insurance regulatory modernization. 
Legislative proposals during that time included an Optional 
Federal Charter for insurers, Federal insurance regulatory 
standards to be administered by the States, and the creation of 
the Federal Insurance Office within Treasury. In addition, I 
was part of the team that led Treasury's involvement in the 
legislative debate that culminated in the passage of the Dodd-
Frank Act, with a particular focus on those provisions of the 
law relating to insurance. Ironically, of all of those 
insurance-related provisions in Dodd-Frank, the one that 
occupied the least amount of my time was the three-line section 
that created the position I now fill.
    It was not until the House-Senate conference committee 
convened that the provision for an insurance member with a 
voting seat on the Council was added to the bill, presumably to 
be a proxy in view of the absence of a Federal insurance 
regulator.
    After retiring from Treasury, I was nominated by the 
President to be the newly created Independent Member of FSOC 
and was confirmed by the Senate in 2011. Today I am the second 
longest-serving voting member on the Council.
    Having been involved in both the development and the 
implementation of Dodd-Frank, I think I bring a unique 
perspective on its treatment of insurance, as I have an 
understanding of how insurance regulatory reform was envisioned 
as working, where that reform has progressed as intended, where 
implementation has been effective, and areas in which it might 
be improved.
    The Council has now designated four companies as 
systemically important nonbank financial institutions, or 
SIFIs, after deciding that their material financial distress or 
failure could pose a threat to the stability of the United 
States financial system: AIG, GE Capital, Prudential, and 
Metlife. I was in the dissenting minority with respect to the 
designation of Prudential and MetLife, but I joined the 
majority in designating AIG and GE Capital.
    I am not here today to debate or rehash any of the SIFI 
designations. However, as noted in my dissents, I believe the 
Council's focus should be on the activities of financial firms, 
the interconnections that might arise from such activities, and 
any potential heightened risks posed by those activities. In my 
opinion, the preferred approach would be for the Council to 
examine whether particular activities present systemic risk 
and, if so, first consider the Council's other options 
available under Dodd-Frank. If a company-specific designation 
does result, however, the Council, in my view, should specify 
the systemically risky or disfavored activities, or the 
combination of these activities, that caused the company to be 
considered a SIFI. This would provide some guidance as to what 
activities need to be addressed--not just so the SIFI can 
``exit'' enhanced supervision but, more importantly, so that, 
over time, the company can reduce its ``systemic footprint'' 
and thus make the financial system safer and more resilient, 
which is, after all, the ultimate objective.
    Another issue raised in my dissents is my concern that 
international regulatory organizations may be attempting to 
exert what I consider to be inappropriate influence on the 
development of U.S. regulatory policy. As you mentioned, in the 
aftermath of the financial crisis, the G20 created the 
Financial Stability Board, or FSB, with the aim of promoting 
global financial regulatory reform and harmonization.
    To that end, the FSB directed the International Association 
of Insurance Supervisors, or the IAIS, to develop 
recommendations as to international insurance capital and other 
standards. These IAIS recommendations are ultimately submitted 
to the FSB for its consideration and international agreement. 
If consented to, they will be targeted at those U.S. insurers 
designated by the FSB as Global SIFIs, as well as those 
classified as Internationally Active Groups.
    While the U.S. Government can enter into consensual 
international insurance agreements, it cannot commit to full 
implementation of those agreements or their underlying 
international standards, as insurance regulation is primarily 
the responsibility of the States. In the U.S., the decision as 
to whether and how to implement any FSB insurance-related 
international standards or policy measures resides with the 
States and their insurance regulators, and in some cases with 
the Fed.
    Under Dodd-Frank, the insurance authorities granted to 
Treasury and the Fed are limited to prudential or regulatory 
matters involving insurance--with trade matters being reserved 
to the USTR. The USTR is not here today. It is not a member of 
the FSB or the IAIS, but it has an important role, as 
envisioned by Congress, especially since international 
agreements at the FSB may well affect market access, directly 
or indirectly.
    It is this contorted international framework that I will 
not get into--my time is running out--that is why I think we 
should be cautious about ongoing initiatives.
    As the negotiations are ongoing before your Committee, 
there is still time to ensure that any international agreement 
consented to by the FSB is reached through a more open process 
and that it is in the best interests of the United States and 
its insurance consumers.
    Again, I appreciate the opportunity to appear before you 
today, and I am pleased to answer any questions you may have. I 
also stand ready to assist the Committee as you continue the 
important work of monitoring international developments and 
improving our regulatory framework.
    Chairman Shelby. Mr. Van Der Weide.

 STATEMENT OF MARK E. VAN DER WEIDE, DEPUTY DIRECTOR, DIVISION 
 OF BANKING SUPERVISION AND REGULATION, BOARD OF GOVERNORS OF 
                      THE FEDERAL RESERVE

    Mr. Van Der Weide. Chairman Shelby, Ranking Member Brown, 
and other Members of the Committee, thank you for inviting me 
to testify today on behalf of the Federal Reserve.
    The Federal Reserve welcomes the opportunity to participate 
in today's hearing, and I am pleased to be joined by my 
colleagues from the FIO and the NAIC and by the Independent 
Insurance Member of the FSOC. While we each have our own unique 
authority and mission to carry out, we remain committed to 
working collaboratively on a wide range of international and 
domestic insurance issues.
    With the enactment of the Dodd-Frank Act, the Federal 
Reserve assumed responsibility as the consolidated supervisor 
of insurance holding companies that own banks or thrifts, as 
well as insurance holding companies that are designated by the 
FSOC.
    Since the passage of the act, we have been hard at work 
creating a supervisory framework that is appropriate for the 
insurance groups that we oversee. Our principal supervisory 
objectives for insurance holding companies are protecting the 
safety and soundness of the consolidated firm and their 
subsidiary depository institutions, and also mitigating any 
risks to financial stability. We conduct our consolidated 
supervision of these firms in coordination with State insurance 
regulators who continue their established oversight of the 
insurance legal entities.
    Congress recently amended the Dodd-Frank Act to enable the 
Federal Reserve to focus on constructing a domestic regulatory 
capital framework for our supervised insurance holding 
companies that is well tailored to the business of insurance. 
Since the passage of this amendment to the Dodd-Frank Act, the 
Fed has been engaged extensively with insurance supervisors and 
insurance firms to solicit views on the various approaches to 
developing an appropriate, consolidated capital regime for 
insurance holding companies. We are committed to continuing 
this engagement and to following formal notice and comment 
rulemaking processes as we move forward on our insurance 
capital work.
    The Federal Reserve is also participating in the 
development of international insurance standards. Some of the 
insurance holding companies that we supervise are 
internationally active firms that compete with other global 
insurers to provide insurance products to businesses and 
consumers around the world. Accordingly, in November of 2013, 
the Fed joined our State insurance supervisory colleagues from 
the NAIC and the FIO as members of the International 
Association of Insurance Supervisors, or IAIS.
    Through our membership in the IAIS, the Fed has been and 
will continue to be engaged in the development of global 
standards for regulating and supervising internationally active 
insurers.
    As a general proposition, we believe in the utility of 
having effective global standards for global financial firms. 
When implemented consistently across jurisdictions, such 
standards can help provide a level playing field for global 
firms, can help limit regulatory arbitrage and jurisdiction 
shopping, and can promote financial stability.
    Since joining the IAIS in late 2013, the Federal Reserve 
has been an active participant in several key committees, 
working groups, and work streams. Throughout our first year-
and-a-half as a member of the organization and consistent with 
our statutory mandate, we have been particularly focused on the 
financial stability and consolidated supervision work of the 
IAIS.
    One of the key strategic priorities of the IAIS is the 
development of a supervisory framework and consolidated capital 
standards for internationally active insurance groups. The 
Federal Reserve supports the construction of groupwide 
supervisory frameworks and consolidated capital standards for 
international insurance groups, so long as they are 
transparently developed, well tailored to U.S. insurance risks, 
properly calibrated, and complementary to insurance standards 
at the legal entity level.
    A second key focus of the IAIS involves the identification 
of global systemically important insurers, or G-SIIs, and the 
design of an enhanced regulatory and supervisory framework for 
G-SIIs.
    It is important to note that any standards adopted by the 
IAIS are not binding on the Fed, the FIO, State insurance 
regulators, or any U.S. insurance company. And during the 
buildout of standards for global insurance firms by the IAIS, 
the Fed will work to ensure that the standards do not conflict 
with U.S. law and are appropriate for U.S. insurance markets, 
U.S. insurance firms, and U.S. insurance consumers.
    Moreover, the Fed will only adopt IAIS regulatory standards 
after following the well-established rulemaking protocols under 
U.S. law, which include a transparent process for proposal 
issuance, solicitation of public comment, and rule 
finalization.
    The Federal Reserve has acted and will continue to act on 
the international insurance stage in an engaged partnership 
with our colleagues from the FIO, State insurance 
commissioners, and the NAIC. Our multiparty dialogue strives to 
develop a central ``Team USA'' position on the most critical 
matters of global insurance regulatory policy.
    The Federal Reserve also will continue to actively engage 
with the U.S. insurance industry to help ensure that any global 
insurance regulatory standards work well for U.S.-based firms.
    Mr. Chairman, thank you for inviting me here today. I look 
forward to an active dialogue on these issues with you and the 
other members of the Committee.
    Chairman Shelby. Mr. McRaith.

   STATEMENT OF MICHAEL MCRAITH, DIRECTOR, FEDERAL INSURANCE 
               OFFICE, DEPARTMENT OF THE TREASURY

    Mr. McRaith. Chairman Shelby, Ranking Member Brown, Members 
of the Committee, thanks for inviting me to testify this 
morning. I am pleased to be here with my colleagues on this 
panel.
    We released the Federal Insurance Office's second annual 
report on the insurance industry in September of 2014. The 
report cited 2013 data showing the U.S. industry reported 
record surplus levels of approximately $990 billion. Non-health 
insurers collected more than $1.1 trillion in premiums in 2013, 
or nearly 7 percent of GDP.
    The report also cites data showing that private market 
volume is increasing dramatically in developing countries. For 
example, China's private insurance market increased by more 
than $137 billion in the last 5 years, South Korea by nearly 
$50 billion, and Brazil by more than $41 billion in that same 
period. These facts illustrate the globalization of the 
insurance market and explain the increased focus on global 
standards.
    For this reason, among others, FIO has a statutory role to 
coordinate and develop Federal policy on prudential aspects of 
international insurance matters, including representing the 
U.S. at the International Association of Insurance Supervisors.
    In this work, we collaborate extensively with our 
colleagues at the Federal Reserve and the State regulators, 
including my two colleagues on this panel. Our U.S. multipart 
supervisory structure must be coordinated in order for the U.S. 
to assert leadership in international developments. That is 
exactly what happens today.
    International insurance standards are not new. The IAIS was 
formed in 1994. In fact, State regulators were among the 
founding members. International standards reflect best 
practices based on collective analysis and the judgment of the 
participants.
    Importantly, international standards are not self-executing 
in the U.S. Federal and State authorities will study, test, and 
analyze the potential value and impact of any international 
standard prior to implementation.
    We have the most diverse and competitive insurance market 
in the world, with insurers that operate in one part of one 
State and insurers that are multinational and engaged in a 
variety of financial services. With this in mind, we work with 
our international counterparts to build a global consensus that 
works for the United States. Simply put, international 
standards must, when implemented, serve the interests of U.S. 
consumers and industry and our national economy.
    The IAIS recently completed structural reform. These 
changes eliminated the pay-for-play dynamic and increased the 
IAIS' transparency and independence. No longer will the IAIS 
depend upon the $20,400 annual fee paid by industry observers. 
Now open meetings and information will be available to all 
stakeholders, not just those who can afford the annual fee. 
Consultation with stakeholders will be more rigorous and 
uniform. After 12 months of extensive public consideration, the 
IAIS implemented in 2015 a better approach to both governance 
and transparency.
    At FIO, we continue to create opportunities for 
stakeholders to meet in one place with all U.S. IAIS 
participants and look forward to increasing those 
opportunities.
    In 2015, we have continued with the EU-U.S. Insurance 
Project. The EU and the U.S. are two important jurisdictions 
both as markets and as homes for insurers. With the 
collaboration of State regulators, we have worked with our EU 
counterparts to improve understanding and compatibility where 
appropriate.
    One objective identified in the project is a covered 
agreement. It is not a trade agreement. A covered agreement is 
an agreement between the United States and another country 
involving prudential insurance measures. We look forward to 
engaging with this Committee before and during the negotiations 
of a covered agreement.
    The U.S. market and its oversight are unique. Through 
effective collaboration at home and abroad, U.S. authorities 
will continue to provide leadership that complements our shared 
interest in a vibrant, well-regulated market that promotes 
competition and financial stability and protects consumers. In 
all of our work, internationally and domestically, Treasury 
priorities will remain the best interests of U.S. consumers and 
insurers, the U.S. economy, and jobs for the American people.
    Thank you for your attention. I look forward to your 
questions.
    Chairman Shelby. Mr. McCarty.

STATEMENT OF KEVIN M. MCCARTY, COMMISSIONER, FLORIDA OFFICE OF 
INSURANCE REGULATION, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                    INSURANCE COMMISSIONERS

    Mr. McCarty. Chairman Shelby, Ranking Member Brown, and 
Members of the Committee, thank you for inviting me to testify 
today.
    The U.S. insurance market is the largest and most 
competitive in the world. Taken individually, U.S. States make 
up about half of the world's 50 largest insurance markets. My 
home State of Florida, for example, is the 12th largest 
insurance jurisdiction in the world. State regulators cooperate 
closely on a regular basis to provide leadership on global 
insurance issues and activities, with a focus on policyholder 
protections and maintaining stable and competitive markets.
    As domestic and global capital rules for insurers are 
discussed and developed, State regulators continue to oppose a 
one-size-fits-all, bank-centric set of regulations and focus 
instead on the importance of company- and product-specific 
analysis and examination. Capital requirements are important, 
but if imposed incorrectly or without regard to differences in 
products and institutions, they can be onerous to companies, 
harmful to policyholders, and may even encourage new risk 
taking in the insurance industry. Any capital requirement must 
be adaptable to our markets and benefit our consumers.
    It is also important to keep in mind that any new standards 
are in addition to, and not in lieu of, State risk-based 
capital requirements applicable to insurers within groups. 
Domestically, we encourage the Fed to work closely with us to 
ensure that standards complement our existing regulatory 
authority. We supported the passage of legislation last year to 
give flexibility to the Federal Reserve to tailor its capital 
requirements for companies subject to their regulation, and we 
are hopeful that they will now use this flexibility to craft 
rules consistent with the insurance business model and our 
legal entity regulation.
    Internationally, the IAIS is developing capital proposals 
for internationally active groups, including many firms based 
in the United States. We have serious concerns about the 
process and the aggressive timeline given legal, regulatory, 
and accounting differences across the globe. All the same, we 
are fully engaged in the process to ensure that any standard 
appropriately reflects the risk characteristics of the 
underlying business and does not lead to unintended 
consequences such as limiting products or stagnating growth, 
jobs, and innovation.
    While we are committed to collaborating with our Federal 
and foreign counterparts where we can, we have a responsibility 
to the U.S. insurance sector. We will not implement any 
international standard that is inconsistent with our time-
tested solvency regime that puts policyholders first.
    Critical to the credibility of the decision making at the 
IAIS is an inclusive and transparent process. We agree that the 
pay-to-play structure had to go, but we remain concerned with 
the new IAIS stakeholder and consultation process. We will 
continue to advocate for increased transparency and encourage 
our Federal colleagues to support this worthy goal.
    We are also concerned with the lack of transparency at the 
FSB. While we appreciate the role of the Fed, the Treasury, and 
the SEC as members of the FSB, we have only limited access to 
the FSB discussions directly relevant to the sector that we 
regulate. What little participation we do have has only 
occurred as a representative of the IAIS, even after requesting 
inclusion from U.S. FSB representatives. Particularly given the 
role of the FSB in designating U.S. insurers as G-SIIs, we find 
the lack of support for our inclusion by our Federal colleagues 
troubling and not in the best interests of U.S. insurers and 
their policyholders.
    For our part, the NAIC has longstanding procedures and 
ongoing responsibilities to seek input from consumers and other 
interested parties. We will continue working on these issues 
through an open, transparent NAIC process. To that end, last 
year, the NAIC formed the ComFrame Development and Analysis 
Working Group, known as CDAWG, which I chair, to provide 
ongoing review of ComFrame and international group capital 
development standards. CDAWG is also exploring group capital 
concepts that would be appropriate for U.S.-based 
internationally active group insurance companies and provide 
comprehensive feedback to the IAIS regarding their proposed 
ICS.
    We also expect to finalize NAIC's updated position 
statements on ComFrame and international capital developments 
shortly, which we will be happy to share with your Committee.
    In conclusion, State regulators have a strong track record 
of effective collaboration and supervision. We remain committed 
to coordinating with our Federal counterparts. We also take 
seriously our obligation to engage internationally in those 
areas that impact the U.S. economy, companies, and consumers. 
State-based regulation is always evolving to meet challenges 
posed by dynamic markets, and we continue to believe that well-
regulated markets at home and abroad make for well-protected 
policyholders.
    Thank you again for the opportunity to be here on behalf of 
the NAIC.
    Chairman Shelby. Thank you, Mr. McCarty.
    I will start with you, Mr. Woodall. Each of the three 
insurers designated by FSOC were also designated by the 
Financial Stability Board, FSB. Two of the companies were 
designated by FSOC after they were designated by the FSB.
    Sir, have you attended the FSB meetings that led to the 
designation of insurance companies?
    Mr. Woodall. No, Senator, I have not. I am not a member of 
any of the international bodies.
    Chairman Shelby. OK. Does FSOC take into account FSB 
designations when considering which nonbanks should be 
designated? And if so, how?
    Mr. Woodall. Well, essentially FSOC has its own 
methodology.
    Chairman Shelby. I know.
    Mr. Woodall. And the IAIS and FSB have their methodology. 
They are very similar. They are distinct in that one is for one 
organization and one is for the other. But my position has been 
they are not dissimilar, and the latest GAO report actually 
showed a chart and compared the methodology of the 
international to what the methodology of FSOC was and found 
them very similar.
    Chairman Shelby. Interesting. Mr. Van Der Weide, Section 
171 of Dodd-Frank, which we call the ``Collins amendment,'' 
Collins and others, requires the Federal Reserve to establish 
minimum leverage and risk-based capital standards for nonbanks 
that it supervises. Based in part on the Fed's indication that 
it lacked the ability to tailor these rules for insurers, 
Congress gave the Fed additional authority for insurers.
    When will the Fed propose a capital rule for insurers under 
its supervision? And will the Fed issue an Advance Notice of 
Proposed Rulemaking before issuing proposed rules? In other 
words, where are you?
    Mr. Van Der Weide. Yes. So we very much appreciate the 
amendment to the Dodd-Frank Act a few months ago that has 
enabled us to tailor our forthcoming insurance capital 
standards to the actual risks of insurance firms. We think that 
is going to enable us to produce a better outcome. And we are 
very much committed to tailoring the forthcoming rule to the 
risks of the insurance firms that we supervise.
    We are in the engagement with industry, data collection, 
and analysis phase of our work at this point. We are engaging 
quite extensively with regulated insurance firms, with trade 
associations, with members of the public, and with State and 
other regulators of insurance to explore the pros and cons of 
various approaches that are possible for the Fed's capital 
rule. We are in the early phases of that work. We will be 
issuing a proposed rule so that, in addition to the ad hoc 
engagement that we have been doing with insurance firms and 
insurance supervisors, we will also go through a formal 
rulemaking process where we issue a proposed rule for comment. 
But I cannot give you a timeline as to when that proposed rule 
is going to come out. At this point we are collecting 
information, and we want to make sure we get the proposal 
right.
    Chairman Shelby. Thank you.
    Mr. McCarty, I understand that the insurance industry's 
focus in the U.S. has traditionally been on protecting the 
individual policyholders while European models traditionally 
focus more on preventing the failure of a company. Could you 
elaborate for the Committee on these differences and what 
importing a European standard would mean for the U.S. markets?
    Mr. McCarty. Well, there are very fundamentally different 
ways of viewing the world. The U.S. system has always been 
predicated on policyholder protection, and when you pursue that 
particular line of philosophy, that engenders a different kind 
of policy response. For instance, we allow companies to fail as 
long as there is capital sufficient to make sure that the 
policyholders are made good on their contracts. A very 
different model than the European system where you are looking 
really at creditors' protection, which gives a whole different 
flavor. I think when you try to harmonize those two, it would 
create the potential for great disruption in the delivery of 
different services in the marketplace and potentially raises 
prices for consumers in the United States and potentially 
jeopardizes the availability of products.
    Chairman Shelby. Mr. McRaith, I continue to hear reports of 
differing positions being held by U.S. representatives in the 
International Association of Insurance Supervisors discussions 
despite modest recent progress. It seems to me that if we are 
going to participate in these discussions, we should speak with 
one voice, and that voice should strongly advocate for 
standards that adhere to the U.S. insurance model.
    Do you agree with this? And if so, what will the Federal 
Insurance Office do to ensure that this occurs?
    Mr. McRaith. Mr. Chairman, I do agree with your statement 
and the objective. That is exactly why we spend so much time 
coordinating with the States and the Federal Reserve. We have a 
unique multipart structure in the United States in terms of 
insurance oversight. It is essential that we work together and 
coordinate. We do it in some cases on the technical subjects. 
Our teams are in contact every day. At the leadership level, we 
have regularly scheduled calls and meetings, frequent 
interaction. It is a relatively new apparatus, if you will. As 
you know, in the last few years our office was created; the 
Federal Reserve assumed its role. I think we have worked 
through the kinks. We are continuing to improve our process.
    Chairman Shelby. I want to go to a last question to Mr. Van 
Der Weide of the Fed. Will you publish the results of the QIS 
before the proposed rule? Where are you there?
    Mr. Van Der Weide. Yes, so last year we conducted a fairly 
extensive Quantitative Impact Study, or QIS, of the U.S. 
insurance industry. This QIS was conducted before the Dodd-
Frank Act had been changed to provide the Federal Reserve with 
the flexibility to adopt a fully insurance-centric capital 
model.
    Chairman Shelby. How important is that?
    Mr. Van Der Weide. It is pretty important. A lot of the 
data that we collected was based on what was then our legal 
restriction, and we were at that point required, in our view, 
to adopt a more bank-centric regulatory capital framework for 
these firms. So we collected an extensive amount of information 
on that form of a capital requirement for insurance firms. But 
now that the Congress has amended the Dodd-Frank Act to give us 
the freedom to do an insurance-centric capital rule, a lot of 
that information is no longer going to be relevant to the path 
forward.
    So the information was important, and it helped us to 
understand a lot of the insurance risk that the firms had. But 
now that the law has changed and we have freedom to develop an 
insurance-centric capital rule, the results of that QIS are no 
longer as relevant as they had been.
    Chairman Shelby. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Van Der Weide, let me start with you. I was encouraged 
that you said in your testimony that you are consulting with 
State supervisors and industry in developing capital standards. 
That is especially important. In the past, I have urged the Fed 
to lead, not follow, when negotiating international bank 
capital standards. I feel the same way about insurance capital.
    When we implemented Basel III in the U.S., regulators made 
changes to some risk weighting and to the leverage ratio. The 
Fed departed from the Financial Stability Board, from the FSB's 
proposal for SIFI surcharges for the largest banks. I think 
that was the right decision also.
    Do you agree that U.S. regulators have the discretion to 
implement international financial agreements, including 
insurance capital standards, as they see appropriate for U.S. 
companies? Do you have that discretion?
    Mr. Van Der Weide. Yes. It has long been true in the 
banking context--and it will be true in the insurance context 
as well--that as a general matter, a fair amount of national 
discretion is provided to each jurisdiction as to how to 
implement the international standard. And we would plan to use 
that national discretion to make sure that any of the 
international standards that come out are as well tailored as 
possible to the risks of the U.S. insurance market.
    Senator Brown. Good. Thank you.
    Mr. McCarty, the Federal Insurance Office's Insurance 
Modernization Report in 2014, annual report, as well as FSOC's 
2014 annual report, all identified concerns with captive 
reinsurance. New York's banking superintendent Ben Lawsky calls 
it ``shadow insurance.'' He has submitted a statement for 
today's hearing in which he says, and I quote, ``It is a 
troubling regulatory loophole that threatens the financial 
stability of the insurance market, puts everyday policyholders 
at substantial risks, and provides billions of dollars in 
unearned tax deductions to large multinational corporations.''
    Mr. Chairman, I would ask, if I could, unanimous consent to 
enter Mr. Lawsky's letter into the record.
    Chairman Shelby. Without objection.
    Senator Brown. Thank you.
    The NAIC has released a revised proposal to address shadow 
insurance, as you know. Many believe that proposal is 
insufficient. When do you expect, Mr. McCarty, forceful action 
to address a practice that allows companies to overstate their 
capital that exposes policyholders and the financial system to 
risk?
    Mr. McCarty. Well, first of all, we have been cognizant of 
this issue for a number of years. In 2011, we first formed a 
task force to look at the use of captives. The issue really 
arose out of the fact that products have been evolving and 
changing over the years. A number of formalistic approaches 
that were in place for traditional types of reinsurance were 
found to be lacking because of the changing and evolving 
marketplace. And one of the ways of addressing that was to use 
captives to provide relief, if you will, for those. I made it 
my goal as NAIC president in 2012 to implement a principal-
based reserving which would right-size the reserving so we had 
a more appropriate reserving protocol addressing all across 
AXXX and XXX products. We believe we have put in examination 
and transparency provisions. We are addressing the issue of 
shadow banking by--or shadow issues by having--both the ceded 
State and the ceding State have to agree with the transaction. 
We are putting more transparency in the process. We have 
organized the Financial Analysis Working Group to evaluate 
these going forward.
    It is also our plan to look at other areas of potential 
captive abuse. We understand that it is a problem. We are 
dumping an enormous amount of resources into this situation, 
and we will continue to monitor this and report to you the 
progress that we make.
    Senator Brown. If the proposal was initially insufficient, 
as some have claimed, are you making up for that?
    Mr. McCarty. No, I think that--the way the process works is 
you put proposals out there, and you look at ways of perhaps 
strengthening that proposal and addressing the shortcomings, 
and we are still engaged in that process and will continue to 
do so. It is our sincere desire as an organization to close 
those loopholes and to ensure that there are not any abuses in 
the captive systems going forward.
    Senator Brown. Thank you.
    Mr. McRaith, do you have any comments on Mr. McCarty's 
comments?
    Mr. McRaith. Briefly. The proliferation of captives is a 
concern. It is a concern in some ways less on the industry 
side. We think most of the industry participants are using 
these in a responsible fashion. But what it does is highlight 
differences between the States, and we have concerns about the 
proverbial race to the bottom. We know the States have 
confronted serious issues like this before and met the 
challenge. So that in the late 1980s, early 1990s, States 
developed an accreditation program, developed statutory 
accounting in the late 1990s. We think that States will meet 
the challenge. It is less on the substance of the oversight, 
more on the implementation and consistency State to State.
    Senator Brown. Thank you.
    Mr. McCarty, one last question for you. A recent Goldman 
Sachs asset management survey of insurance executives found 
that U.S. insurers are looking to invest in less liquid assets 
like private equity and hedge funds, commercial mortgage loans, 
midsized business loans, and securitized credit. Insurers are 
also likely to outsource some of these investments to third-
party asset managers because they lack the systems or the 
infrastructure to do it themselves.
    How are State regulators monitoring these investments, 
including the third-party asset managers----
    Mr. McCarty. Yes, we are very concerned about the role that 
equity hedge funds are playing with regard to--there have been 
some issues that have been raised, we have seen in articles 
recently in newspapers. We have formed a specific working group 
to address these issues, a way of addressing this in the long 
term.
    Senator Brown. Anyone else want to comment on that?
    Mr. McRaith. Very briefly, Senator, the article points to 
the need for vigilance and real diligence at the State 
regulatory level and from all supervisors to monitor the inflow 
of unconventional capital into the insurance space.
    Senator Brown. Mr. Woodall.
    Mr. Woodall. In that report, in that survey--really it is a 
survey--when you get into as far as trying to farm out some of 
these activities, I think that the charts show that it is a 
pretty low percentage, maybe 12 percent, even considering that. 
That is what really it was. It was a survey by Goldman Sachs, 
and it was just reflecting what they were told by the 
companies.
    Senator Brown. Thanks.
    Chairman Shelby. Senator Rounds.
    Senator Rounds. Thank you, Mr. Chairman.
    Mr. McCarty, the National Association of Insurance 
Commissioners has a long history of successfully regulating and 
working through with the different States the business of 
insurance, and I might say successfully regulating over an 
extended period of time. When I was a State legislator, we 
worked using model legislation from the National Association of 
Insurance Commissioners, which we put in and changed the health 
insurance laws within our State, and we ended up with 
approximately 93 percent of all of our individuals having the 
opportunity to purchase insurance because of those model pieces 
of legislation, and it enhanced the market.
    I have been very impressed over a period of years--and I 
was an actually an independent insurance agent in South Dakota, 
and I was very pleased with the way that the NAIC worked 
through a number of issues.
    I am just curious. With regard to the NAIC, are there 
situations out here in which the changes that have been brought 
about from 2007 forward through the initiation of Dodd-Frank 
and all that goes with it, has this helped the National 
Association of Insurance Commissioners to do their job? Or have 
you found those changes and the further involvement at the 
Federal level, have you found that to be a detriment in terms 
of being able to assist in the regulatory process?
    Mr. McCarty. Well, if you look at the aftermath of the 
financial crisis and the enactment of Dodd-Frank, Dodd-Frank 
for all intents and purposes left the State regulatory system 
intact, and I think that was congressional recognition that the 
States have been an effective force in protecting consumers and 
weathering through the financial crisis identifying, of course, 
the role of the Federal Insurance Office to help identify gaps, 
to be the voice of the U.S. Government as appropriate at the 
IAIS. So I think that, you know, there has arguably been some 
improvements.
    We are, you know, finding our way in a new framework, and I 
think that the NAIC has really redoubled its efforts to try to 
identify through our Solvency Modernization Initiative to see 
what things we could do enhancing our Holding Company Act, for 
instance, looking at best practices around the world by using 
an own risk assessment like ORSA in our system and other ways 
to improve our regulatory system.
    So we saw the challenges of the financial crisis as an 
opportunity to really bring out the best that the NAIC has to 
offer, which is to look at best practices around the country, 
around the world, and strengthening our solvency regime.
    Senator Rounds. What has been your biggest challenge in 
finding your way?
    Mr. McCarty. You know, I think that the struggles really 
have been--I think our biggest struggle to date really has to 
deal with our captives. I think we have done a lot to address 
the holding company--we have enhanced our Holding Company Act. 
I think our Holding Company Act would be comparable to what is 
being used as the standard around the world.
    I think we have had good success in our reinsurance 
collateral reduction. You know, our goal this year is to be at 
93 percent, which is a monumental achievement.
    I think one of the things that challenges us is the fast 
changing world and the fast changing dynamics that requires us 
to change our business practices at home for us to have more 
rapid response teams, to have deliverables in a more timely 
fashion, and to coordinate our work with the Federal Reserve 
and FIO on the international arena so that, to the best of our 
ability, despite very different cultures and a very different 
view of the world, we have to do our best to come up with a 
``Team USA'' response which I think strengthens our position 
globally and will have an impression on the development of the 
ICS as well as ComFrame.
    Senator Rounds. Thank you.
    Mr. Woodall, I noted in the testimony that you had provided 
to us earlier, you noted that the international insurance 
capital agreements contain, as you put it, ``risks of 
unintended negative effects on the U.S. insurance consumers.'' 
Can you provide me with some examples of what these potential 
negative effects might be?
    Mr. Woodall. Well, when you are talking about potential, 
you do not know how negative they would be. But what I am 
saying is that when you do that, even though you are talking 
about prudential agreements, that is a very thin line between 
that and what a trade agreement might be, because it could 
affect access of companies abroad, like trade would do, either 
directly or indirectly. And that is what I was saying that we 
do not know when those things are being worked out at the 
international level, how they might affect it. And that is why 
it is so important that it be administered through the 
regulatory system that is set in place by Congress with the 
States and now with the Fed from Dodd-Frank.
    Senator Rounds. Thank you.
    Mr. Chairman, thank you.
    Chairman Shelby. Senator Tester.
    Senator Tester. Thank you, Mr. Chairman. I want to thank 
you all for your testimony today, very, very good. And a 
special welcome to Senator Nelson. It is good to see you here 
back on the Hill.
    I am going to start with you, Director McRaith. Senator 
Heller and I introduced the International Insurance Capital 
Standards Accountability Act yesterday, and this bill would 
require the Federal Reserve to create an Advisory Community on 
International Insurance Standards. I know that FIO already has 
an advisory committee. Could you briefly tell me how that is 
working out for you?
    Mr. McRaith. Sure. So we were able to establish an advisory 
committee pursuant to the Federal Advisory Committee Act. We 
did not need a statutory requirement.
    Senator Tester. Right.
    Mr. McRaith. We have excellent contributions on that 
committee from State regulators, former--Commissioner Lindeen 
is as former member. We are learning how to make the best use 
of the time of those members. But we also receive advice and 
consult with stakeholders through many avenues, not just 
through our advisory committee.
    Senator Tester. Yes. But you consider that a positive 
avenue for getting information?
    Mr. McRaith. We welcome advice and perspective in every 
opportunity.
    Senator Tester. Good. Now, you were directed by FSB to 
develop some international insurance standards, correct? And 
how often do you meet, the IAIS?
    Mr. McRaith. The IAIS, at a technical level, meets 
frequently. In fact, a few weeks ago there were meetings in New 
York for a couple days, followed by a full-day public session. 
There is another public session, I think in New York, on May 
6th.
    Senator Tester. All right. Are these advertised?
    Mr. McRaith. Yes, these public sessions are well known.
    Senator Tester. And what is the difference between the 
technical level and the public level?
    Mr. McRaith. So the technical level, the technical experts 
from around the world--the NAIC, the Federal Reserve, our 
office--will all meet with their counterparts around the world 
and discuss the important technical issues, for example, in the 
development of a capital standard.
    Senator Tester. All right. Are there observers in the 
technical-level meetings?
    Mr. McRaith. The observers are--that is the value of the 
full-day public session. So there are a few days of meetings 
where ideas are developed. There is then a sharing of those 
ideas throughout the year. In fact, I think notably last year 
there were 12 hours for that subject; this year there are 
already 60 hours scheduled.
    Senator Tester. So when you have public meetings, you have 
consumer groups, advocates, and companies that can come?
    Mr. McRaith. In fact, yes. This year----
    Senator Tester. OK. So----
    Mr. McRaith. Last year, it was restricted to those who paid 
the fee. This year, anybody----
    Senator Tester. No, and we are not for the pay-to-play 
stuff. But they can come.
    Mr. McRaith. That is right.
    Senator Tester. Are they invited, do they have to be 
invited? Or can they just show up?
    Mr. McRaith. No, for the public sessions any person--your 
staff----
    Senator Tester. So that is good. So can you tell me why 
they are not allowed at the technical session? Or are they 
allowed?
    Mr. McRaith. So the technical developments, again, brings 
people from around the world----
    Senator Tester. I got you.
    Mr. McRaith. ----with different perspectives.
    Senator Tester. But why wouldn't you allow folks from 
industry and consumer groups, companies, advocates to listen?
    Mr. McRaith. So those--any work product generated by those 
committees is shared directly with the stakeholders.
    Senator Tester. I got you.
    Mr. McRaith. We also do that in the United States; we host 
sessions for stakeholders here with the States and----
    Senator Tester. I understand, but it appears to me that the 
real work--the formalized work will be done in a public 
session. The real work is done in the technical sessions. Am I 
wrong on that?
    Mr. McRaith. Well, I disagree in this sense, Senator, 
respectfully: The real work is the engagement and the 
opportunities for engagement, so the development of the idea is 
then shared publicly, and the stakeholders are given 
opportunities not just through formal written mechanisms, but 
to provide direct feedback on the subject.
    Senator Tester. OK. So were these technical meetings that 
the folks were paying to play at? Were those technical meetings 
that they were asked not to come back?
    Mr. McRaith. They were significantly less technical than 
the meetings now. In fact, this year, they are able to--they 
are authorized to provide much more technical input much 
earlier in the process.
    Senator Tester. Not unlike everybody that is on this--I 
mean, I have been on boards my whole life, and I know that 
there is--we make rules, and we develop policy, and we develop 
regulation. And it is my opinion in this democracy it ought to 
be open. And I do not think there is anything to be afraid of 
when you are sitting down with these technical meetings, to sit 
down and let them listen. There is nothing wrong with that. If 
there is something wrong with that, you have got to tell me. 
And let them in on it, because, quite frankly, once it gets to 
a public situation from my perspective--and I have never been 
to one of these meetings, technical or otherwise--it has 
already been greased, it is already going.
    Mr. McCarty, would you like to respond to that at all?
    Mr. McCarty. Yes, I would like to intervene. Ten years ago, 
Al Iuppa, who was the president of the NAIC and also the 
executive chair of the IAIS, pushed very hard to make the IAIS 
look more like the NAIC.
    Senator Tester. Right.
    Mr. McCarty. The working groups and the working parties are 
where the decisions and discussions were ultimately made, and 
where the documents were first being formulated. It gave an 
opportunity for the insurance industry to say, wait a minute, 
that may work for a business practice in Europe, but our 
business structure in the United States is very different, and 
then they went off for help in developing that. So I think it 
actually improved the product.
    Senator Tester. I agree with you. And not only the industry 
but advocates, consumers, the works, right?
    Mr. McCarty. Right. And we funded consumers last year to 
start attending these.
    Senator Tester. Yes. Look, I agree with the pay-to-play 
stuff. I do not think it should be--but I am telling you, 
transparency in Government is a good thing across the board. 
And the more people you can have--it makes it a pain in the 
neck, but the more people you can have giving their input, the 
better off we are. Thank you very much.
    Thank you, Mr. Chair.
    Chairman Shelby. Senator Heller.
    Senator Heller. Mr. Chairman, thank you, and it is a 
pleasure to follow up after my friend from Montana. And a piece 
of legislation that we put together, I would like to just run 
down just a little bit, Mr. Chairman, what this legislation 
does, because in the vein of what he was saying--and I think I 
want to continue my questions down that path of the importance 
of accountability, transparency, and collaboration. I think 
that is incredibly important as we move forward.
    And I certainly hope, Mr. Chairman, that you will take a 
good look at this because I think it is an important piece of 
legislation. I am not sure that I am comfortable with the 
Treasury's answers coming from the good Senator from Montana, 
but we will certainly try to get there. What we are trying to 
do in this effort is to make sure that the Federal Reserve and 
the Treasury provide Congress with an annual report and 
testimony on their activities with these forums, especially the 
International Insurance Forum.
    There was a good article today in the Wall Street Journal 
that discussed what we introduced yesterday, and I certainly 
believe that Senator Tester and I are moving in the right 
direction. What we really want for our bill is to ensure that 
the Federal Reserve and the Treasury study and report to U.S. 
consumers and the market before--before--they enter into any 
international capital standards.
    So let me try the Federal Reserve a little bit. Mr. Van Der 
Weide, shortly after the Federal Reserve joined the 
International Association of Insurance Supervisors, the IAIS 
voted to shut out the public observers, including consumer 
groups, from most of the meetings. Can you tell us how our 
representative voted on this issue?
    Mr. Van Der Weide. The Federal Reserve has been supportive 
of the IAIS structural reforms. Similar to the FIO, we felt 
like that those were good global regulatory policy moves. It is 
important, though, as the IAIS removes the paid observer status 
and attains funding that is not coming from the industry, that 
they keep as much of the transparency benefits of the old 
program as they can. They are doing what they can. They are 
holding multiple stakeholder meetings quite frequently on their 
developing capital rules and supervisory framework. They plan 
to continue to do that in formal, fully public meeting 
environments. This is more public transparency than there was 
before on those meetings.
    So we are generally supportive of this IAIS move. I think 
it is incumbent on us as well, as U.S. members of IAIS, to 
enhance that global transparency and to provide as much U.S. 
stakeholder transparency as possible, and we have been doing 
that over the last 6 to 9 months. We plan to continue to do 
that going forward.
    Senator Heller. Let me make sure I understand you answer. 
So when the IAIS voted to shut out the public, our 
representative voted with the majority on that.
    Mr. Van Der Weide. The Federal Reserve does not have a 
member on the executive committee, the highest decision-making 
level body of the IAIS, so I cannot say that we----
    Senator Heller. How about the Treasury Department? Did you 
have a representative on that?
    Mr. McRaith. That is correct, Senator.
    Senator Heller. How did they vote?
    Mr. McRaith. We voted in support of the enhanced 
transparency that resulted from the structural changes. This 
year, for the first time we have required public sessions for 
all of the IAIS work streams. Last year, as I mentioned, there 
were just over 10 to 12 hours of those sessions. This year 
already we have about 50 to 60 hours and counting. So we are 
pleased with the level of engagement. It is much more 
substantive, technical, and the opportunities for engagement 
are much greater than ever before.
    Senator Heller. Mr. McCarty, do you have any comments?
    Mr. McCarty. Well, you know, I agree with my colleagues 
that we needed to amend the process as it was, that we needed 
to amend the pay-to-play. But there were many other less 
intrusive ways of doing it than just closing it out completely 
to observers and consumers. I voted against that change; so did 
all of my colleagues from the NAIC. I sincerely believe that 
both the Federal Reserve and FIO are really looking for better 
ways to include stakeholders, but I was at the first 
stakeholders meeting, and I do not think it was going in the 
right direction in terms of the interaction that was necessary 
to provide the kind of feedback that the insurance industry 
needs in order for them to be a meaningful partner in the 
development of the standards. And hopefully going forward our 
colleagues can work together to find ways to improve that 
system.
    Senator Heller. Mr. Chairman, I am grateful that we have 
our witnesses with us today and their expertise. I just want to 
reemphasize the importance of this piece of legislation. We are 
talking accountability, transparency, and collaboration. I want 
to see that done. That is why Senator Tester and I are working 
together on this. So thank you.
    Chairman Shelby. Thank you.
    Senator Scott.
    Senator Scott. Thank you, Mr. Chairman. And thank you to 
the panel for taking the time to be here with us today and talk 
about a very important issue from my perspective. I spent 
several years in my career in the insurance industry and am 
thankful that I had that opportunity and think that the 
uniqueness of the insurance industry is easily differentiated 
from the opportunities and uniqueness in the industries like 
banking. So the capital standards are very important how we get 
there. We should have a serious, long conversation about those 
capital standards as we move from in making sure that we have 
the delineation between the insurance industry and the banking 
industry as it relates to those capital standards.
    My question, Mr. Woodall, is really about the FSOC and the 
SIFI designation process. FSOC is Dodd-Frank's super-regulator 
and consists of 15 financial regulators, each with vastly 
different jurisdictions and backgrounds. While there may be 
some value derived from getting this group together from time 
to time, I have real concerns with the designation voting 
process.
    For example, the Director of the Federal Housing Finance 
Agency, which is the conservator for the GSEs, and the Chair of 
the National Credit Union Administration each have as much say 
on whether an insurance company gets designated as a SIFI as 
you do, the Independent Member with Insurance Expertise.
    Now, Director Watt and Chairman Matz are honorable and 
smart people, but I do think that you have a much better 
barometer of an insurance company's systemic risk than they do, 
and that matters. Let us take, for example, the case of 
Prudential. The FSOC voted to designate Prudential. You voted 
in your dissent, however, that ``the FSOC's analysis of 
systemic risk makes it impossible for me to concur because the 
grounds for the final determination are simply not reasonable 
or defensible and provide no basis for me to concur in the vote 
for designation.''
    Can you please elaborate on your dissent and more generally 
on what systemic risk would look like in the insurance industry 
if it were to exist? Based on your experience with the 
Prudential and MetLife voting process, do you think the FSOC 
designation process should be reformed to give a greater say to 
members with a background in the company whose designation is 
at issue?
    Mr. Woodall. Well, Dodd-Frank actually gives two statutory 
determination standards in determining a SIFI, and one is that 
material financial distress could be a threat to the financial 
stability of the United States. That was the one that was used.
    The second one is that the activities of the company or the 
mix of activities could amount to be a threat to the financial 
stability.
    My position was that by taking just a scenario and 
projecting it to say that if they are in trouble it is going to 
be a threat, I would like to know what the activities are that 
people feel is a threat, and then that way the regulators know 
what the fix, the Fed knows what to fix when they get them, and 
then there is an exit ramp to get out if they do correct them, 
because what are trying to do is remove any systemic footprint 
that any of these companies leave. That was the basis of my 
dissent, and in both the dissents that I had, the State 
regulator nonvoting member also filed a comment, and then the 
FHFA, as you mentioned, also dissented in the Prudential 
matter.
    Senator Scott. Thank you.
    Chairman Shelby. Senator Warren.
    Senator Warren. Thank you, Mr. Chairman. I am glad we are 
here today to talk about insurance and insurance regulation, 
because I have been looking at a problem that is costing 
American families about $17 billion a year, and it starts with 
loopholes in the laws that make it perfectly legal for brokers 
and advisers, including folks who sell insurance products, to 
take kickbacks for pushing lousy retirement products on 
unsuspecting families.
    Now, consider what happens with annuities. An annuity is an 
insurance product in which somebody invests today in order to 
get a steady payout when they hit retirement. The insurance 
industry is selling about $200 billion worth of annuities every 
year, and there may be some circumstances where buying an 
annuity makes sense. But as one observer noted, ``It is not an 
accident that objective fee-only advisers hardly ever recommend 
annuities, while commissioned sales people seem to love them.''
    Now, I got interested in what kinds of kickbacks some of 
these insurance salesmen were getting when they pushed people 
to buy annuities, and what I found is pretty amazing. I found 
free cruises, luxury vacations at five-star resorts, an African 
safari, private yacht tours of the Mediterranean, iPads, 
Mercedes Benz leases, and--get this one--a diamond-encrusted 
NFL Super Bowl style ring with a large ruby in the middle.
    Mr. Chairman, I would like to enter a few of these examples 
in the record, if I may.
    Chairman Shelby. Without objection, it is so ordered.
    Senator Warren. Thank you, Mr. Chairman.
    You know, that is a lot of money going to agent kickbacks 
instead of returns to customers who are just trying to provide 
for their retirement.
    Now, Mr. McCarty, you have been Florida's insurance 
commissioner for over a decade, and in that role you have been 
a real leader in protecting vulnerable seniors from some of the 
insurance industry's most abusive practices around annuities. 
Since you are here today, could you describe some of the 
practices that you have found in this market?
    Mr. McCarty. Yes. I share your deep concern for the 
vulnerability of our consumers, particularly as it relates to 
sales of annuities, where there is a lot of opportunities for 
misleading our elder seniors into buying products that are not 
suitable for them, and we use the term ``churning and 
twisting,'' where you would move them from one product to 
another product so you could get the new commission and 
potential bonuses that you have already articulated.
    We have taken a very aggressive role in Florida. We have 
specific laws not only in the insurance code but in the general 
code against any type of profiteering off of our seniors. We 
have passed extensive laws that require the salesmen to explain 
the different products that they are selling and how a 
difference in the product they have and why it would be 
superior.
    We also have a rescission provision, a 14-day lookback 
period, but I have also been empowered by the Florida 
Legislature to rescind those contracts and return all the 
premium to the consumers if we find out that was something 
inappropriate to be done to that consumer.
    We also looked at a lot of things in terms of we are one of 
the few States that look at sales materials to make sure they 
are not misrepresenting to our seniors.
    So we have an aggressive policy of protecting consumers in 
Florida, and we are continuing to look at other States for best 
practices and would certainly welcome opportunities to do what 
we can. We want to make sure that there is a flow of benefits. 
We do not want to stop the opportunity of consumers, because 
there are legitimate products. But at the same time, we need to 
be vigilant in protecting our consumers, and I am proud that we 
do that in Florida.
    Senator Warren. Well, I want to thank you very much for 
your work. As you point out, you are one of the few States that 
is that aggressively involved.
    You know, most Americans have no idea that the people they 
go to for retirement advice could get such outrageous giveaways 
for pushing these products. I believe that the solution here 
starts with transparency. That is why today I launched an 
investigation, sending letters to the 15 largest annuities 
companies, describing the kickbacks that I found, and asking 
them to disclose complete information on the perks, the 
rewards, the incentives, or whatever else they call the 
inducements they offer to sell these annuities to families and 
small investors who are trying to plan for their retirements.
    I believe that transparency is a powerful first step, but 
it is not enough. We all know that investing has risks and 
nobody is entitled to a guaranteed result. But there should be 
some basic rules of the road to make sure that investment 
advisers cannot get rich on kickbacks and that giveaways like 
these cause unsuspecting customers to lose out.
    The Department of Labor is working right now to set up 
those rules. I believe they should act forcefully and quickly, 
and we should help them in any way we can.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator.
    Senator Kirk.
    Senator Kirk. Mr. Van Der Weide, I had a question about--as 
you know, the insurance industry is a pretty large employer in 
my State, and in your implementation of the Collins fix, I 
would like to know how the process is going to establish a 
different capital standard for the insurance industry.
    Mr. Van Der Weide. The process is going well, I think. We 
are in the information collection and analysis phase, so we are 
engaging heavily with a variety of insurance stakeholders in 
the United States, including individual insurance firms, their 
trade associations, and also interacting with insurance 
supervisors--State insurance supervisors, and foreign 
supervisors as well--to get their views on the best way for us 
to go.
    This is going to be a very challenging task for us. The 
Collins amendment fix is very useful, and it will help us to 
get to an insurance-centric, insurance-tailored capital 
requirement. But the U.S. insurance industry is pretty 
intensely heterogeneous, and the 17 firms that we supervise are 
also intensely heterogeneous. We need to devise a regulatory 
capital framework that works for life insurers, for property 
and casualty insurers, for mutuals, for nonmutuals, for 
systemically important financial institutions, and the smaller 
firms.
    We have a lot of work to do, but thanks to the amendment to 
the Dodd-Frank Act, I think we will be able to, at the end of 
the day, produce a capital requirement that works well for all 
the firms that we supervise.
    Senator Kirk. Let me follow up and ask you what would slow 
down or speed up your work.
    Mr. Van Der Weide. I think the work is going pretty well as 
it is. We have had some pretty high quality and reasonably high 
quantity consultations with the insurance industry and various 
other groups. I think we are getting the information that we 
need.
    To the extent that we decide we need additional 
information, formally or informally, I think we can get that. 
At this point I think the process is pretty well in train.
    Senator Kirk. Mr. Chairman, I think we really need to get 
this right to make sure that we do not regulate the insurance 
companies like banks, which could put our insurance industry at 
a serious competitive disadvantage. I want to make sure that 
you have the expertise and ability and the time that you need 
to come up with a correct standard.
    Mr. Van Der Weide. I think we do, and we could not agree 
with you more that insurance companies have a very different 
business mix and risk profile than banks, and a bank-inspired 
capital framework is not the appropriate one for these firms. 
So we have built some expertise. We are building more 
expertise, and we are in a pretty deep engagement process with 
external parties to make sure that we understand how the U.S. 
State-level insurance capital rules work and the pros and cons 
of the different options.
    Senator Kirk. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    I have one question, Mr. Van Der Weide. Many insurers, as 
you well know, hold assets to match long-term liabilities. They 
argue that measuring the day-to-day fluctuations in those 
assets through a capital regime would create harmful volatility 
and inaccurately measure solvency.
    Do you agree with this assessment?
    Mr. Van Der Weide. Yes, insurers are quite different from 
banks in some material ways, and one of them is in the nature 
of the assets and liabilities mix that they have and the 
potential mismatch between their assets and liabilities. Most 
insurance firms, particularly life insurance firms, have 
longer-term liabilities and longer-term assets, and that needs 
to be reflected in any capital framework or supervisory 
framework that we develop or any insurance regulator develops. 
So that is a key issue that we need to keep in mind as we move 
forward.
    Chairman Shelby. Sir, how will the Federal Reserve ensure 
that the capital regime developed for insurers matches the 
held-to-maturity practice of insurers?
    Mr. Van Der Weide. I think we will do that.
    Chairman Shelby. OK.
    Mr. Van Der Weide. This is an issue where there is some 
international disagreement. Different insurance regulators and 
supervisors around the world treat these assets differently. So 
this is an issue that is going to be front and center in our 
international debates. It has been in the construction of the 
insurance capital standard, the ICS. We are going to be very 
focused on that. ``Team USA'' will be very focused on that as 
we move forward, and we want to make sure that we have a 
capital regime that does work for the economics of the U.S. 
insurance model.
    Chairman Shelby. Thank you. Gentlemen, we thank all of you 
for participating in the hearing. We have got some work to do, 
and we appreciate your information and your involvement. Thank 
you.
    [Whereupon, at 11:17 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF S. ROY WOODALL, JR.
   Independent Member with Insurance Expertise, Financial Stability 
                           Oversight Council
                             April 28, 2015
    Thank you, Chairman Shelby, Ranking Member Brown, and Members of 
the Committee, for inviting me to appear before you today. This is my 
second appearance before the Committee and I truly appreciate the 
opportunity to share my thoughts with you on this important topic.
    After a career in the insurance sector and its regulation that 
began in 1961, I was asked in 2002 to assist the U.S. Department of the 
Treasury (Treasury) for 1 year with the implementation of the Terrorism 
Risk Insurance Act (TRIA), but ended up staying at Treasury for 8 
years, during Republican and Democratic administrations, and serving 
under four different Treasury Secretaries.
    While at Treasury, my insurance portfolio was broad, but a 
recurring theme was insurance regulatory modernization. Proposals 
during that time included an Optional Federal Charter for insurers, as 
well as Federal insurance regulatory standards that would serve as a 
State regulatory floor. I also worked on legislative proposals that 
eventually led to the creation of the Federal Insurance Office (FIO) 
within Treasury, and was a principal contributor to the insurance 
sections in Treasury Secretary Paulson's Blueprint for a Modernized 
Financial Regulatory Structure (2008) and Secretary Geithner's 
Financial Regulatory Reform, a New Framework (2009).
    In addition, I was part of the team that led Treasury's involvement 
in the legislative debate that culminated in passage of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (Dodd-Frank), with a 
particular focus on the provisions of the law relating to insurance. 
Ironically, of all of those insurance-related provisions in Dodd-Frank, 
the one that occupied the least amount of my time was the three-line 
section that created the position I now fill. \1\ It was not until the 
House-Senate conference committee convened that the provision for an 
insurance member with a voting seat on the Council was added to the 
bill. Because insurance is functionally regulated by the States, the 
position was essentially intended to be a ``proxy'' in the absence of a 
Federal insurance regulator to counterbalance the other nine voting 
Council members.
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     \1\ First, Section 111(b)(1) of Dodd-Frank lists the voting 
members of the Council and includes ``(J) an independent member 
appointed by the President, by and with the advice and consent of the 
Senate, having insurance expertise.'' Second, Section 111(c)(1) of 
Dodd-Frank sets the Independent Member's term: ``The independent member 
of the Council shall serve for a term of 6 years . . . .'' And third, 
Section 111(i)(2) sets the level of the Independent Member's 
compensation.
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    After my retirement from Treasury, I was nominated by the President 
to be the newly created Independent Member of the Council and was 
confirmed by the Senate in 2011. And today, I am the second longest-
serving voting member on the FSOC.
    Having been involved in both its development and now its 
implementation, I think I bring a unique perspective on Dodd-Frank's 
treatment of insurance, as I have an understanding of how insurance 
regulatory reform within Dodd-Frank was envisioned as working, where 
that reform has progressed as intended, where implementation has been 
effective, and areas in which it might be improved.
    In exercising its Dodd-Frank authorities, the Council has 
designated four companies as systemically important nonbank financial 
institutions, or ``SIFIs,'' after deciding that their material 
financial distress or failure could pose a threat to the stability of 
the U.S. financial system: American International Group (AIG), GE 
Capital Corporation (GE Capital), Prudential Financial Inc. 
(Prudential) and MetLife Inc. (MetLife). I was in the dissenting 
minority with respect to the designation of two of those companies--
Prudential and MetLife, but joined the majority in designating the 
other two--AIG and GE Capital, as well as the Council's decisions not 
to advance for further review five other nonbank financial companies.
    I am not here to debate any of the four SIFI designations. However, 
as noted in my dissents, I believe the Council's focus should be on the 
activities of financial firms, the interconnections that may arise from 
such activities, and any potential heightened risks posed by those 
activities. In my opinion, the better approach would be for the Council 
to examine whether particular activities present systemic risk, and if 
so, consider the Council's other options available under Dodd-Frank: 
(1) make recommendations to regulators or to Congress aimed at those 
activities; (2) designate the activities themselves as presenting 
systemic risk; and/or (3) designate companies that, in a concentrated 
manner, engage in such activities or mix of activities in a manner that 
could pose a threat to U.S. financial stability. If a company-specific 
SIFI designation does result, the Council, in my view, should specify 
the systemically risky or disfavored activities, or the combination of 
those activities, that caused the company to be considered a SIFI. This 
would provide some guidance as to what activities need to be 
addressed--not just so the SIFI can ``exit'' enhanced supervision, but, 
more importantly, so that, over time, the company can reduce its 
``systemic footprint'' and thus make the financial system safer and 
more resilient, which is, after all, our ultimate objective.
    Another issue raised in my dissents is my concern that 
international regulatory organizations may be attempting to exert what 
I consider to be inappropriate influence on the development of U.S. 
regulatory policy. I would like to elaborate on this concern today, as 
I remain wary of such influence on our U.S. domestic insurance 
regulation.
    Even though the three lines in Dodd-Frank creating the Independent 
Member position do not specifically charge it with a specific 
international role, all members of the Council have a duty under Dodd-
Frank, ``to monitor domestic and international financial regulatory 
proposals and developments, including insurance and accounting issues, 
and to advise Congress and make recommendations in such areas that will 
enhance the integrity, efficiency, competitiveness, and stability of 
the U.S. financial markets.''
    It is through exercising this general charge that I have become 
concerned over international developments and pressures. In the 
aftermath of the financial crisis, the Group of Twenty (G20) created 
the Financial Stability Board (FSB) with the aim of promoting global 
financial regulatory reform and harmonization. The FSB's mandate is to: 
``promote international financial stability; . . . by coordinating 
national financial authorities and international standard-setting 
bodies as they work toward developing strong regulatory, supervisory 
and other financial sector policies . . . [and] foster a level playing 
field by encouraging coherent implementation of these policies across 
sectors and jurisdictions.''
    To that end, the FSB directed the Basel, Switzerland-based 
International Association of Insurance Supervisors (IAIS)--an 
international standard-setting organization composed of global 
insurance supervisors and supported by the Bank for International 
Settlements (BIS)--to develop recommendations to the FSB regarding 
international insurance capital and other standards. These IAIS 
recommendations are ultimately to be submitted to the FSB for its 
consideration and international agreement. If consented to, these 
international standards will be targeted at those U.S. insurers 
designated by the FSB as Global SIFIs, as well as those classified as 
Internationally Active Insurance Groups.
    Decisions made at the FSB, such as those that may soon include 
international insurance standards and policy measures, are made in 
private and by ``consensus,'' including the consent of the three U.S. 
Government agencies that are members of the FSB and act as ``national 
authorities'' for the U.S.--Treasury, the Board of Governors of the 
Federal Reserve System (Board of Governors), and the United States 
Securities and Exchange Commission (SEC). U.S. State insurance 
regulators are not represented at the FSB, nor are they party to any 
consensus agreements at the FSB. In my opinion, U.S. interests may be 
underrepresented at the FSB, not only regarding the insurance industry, 
but also as a function of the absence of other U.S. financial 
regulatory agencies.
    Additional international pressures are exerted through the 
International Monetary Fund and World Bank Financial Sector Assessment 
Program (FSAP), which issues public ``report cards'' on U.S. insurance 
regulators' compliance with the IAIS International Core Standards 
(ICPs). The most recent FSAP report acknowledges that the U.S. is the 
largest insurance market in the world and has strong consumer 
protections. However, it found the U.S. lacking in rigid compliance 
with some of the ICPs, and endorsed more Federal government involvement 
in U.S. insurance regulation.
    While the Federal Government can enter into consensual 
international insurance agreements, it cannot commit to full 
implementation of these agreements or their underlying international 
standards, as insurance regulation is primarily the responsibility of 
the States. In the U.S., the decision as to whether, and how, to 
implement any FSB insurance-related international standards and policy 
measures resides with the States and their insurance regulators (as 
provided by Congress under the McCarran-Ferguson Act and reaffirmed in 
the Gramm-Leach-Bliley Act and Dodd-Frank). The Board of Governors was 
granted certain authorities by Dodd-Frank in addition to those held by 
the States with respect to a subset of insurance companies that are 
either part of a savings and loan holding company, or part of parent 
holding company that has been designated as a SIFI by the Council. 
Accordingly, it is critically important to look to the views of the 
State regulators and the Board of Governors regarding implementation of 
any forthcoming international insurance agreements.
    It is also important to remember that international agreements and 
commitments made by the U.S. members of the FSB, including the adoption 
of IAIS measures, are commitments made under the auspices of the G20. 
As such, they carry considerable weight. Although it is true that they 
are not legally binding, such commitments are expected to be 
implemented as part of the G20's global regulatory reform agenda. 
Indeed, the current Chairman of the FSB, Bank of England Governor Mark 
Carney, recently informed the G20 Finance Ministers and Central Bank 
Governors that ``full, consistent, and prompt implementation'' of 
agreed reforms is essential to maintaining an open and resilient global 
financial system.
    If an internationally agreed-upon insurance agreement is not fully 
or uniformly implemented by the States, or not comparably implemented 
for both dually regulated (State and Federal) and State-regulated 
insurance companies, it could, at a minimum, reflect negatively on U.S. 
leadership internationally. Moreover, less than full implementation of 
such agreements in the U.S. could prompt foreign jurisdictions to 
subject U.S. insurers operating abroad to more stringent regulation, 
which, in turn, could affect U.S. competitiveness. We should be guided 
by what this situation could mean for U.S. insurance consumers and 
whether it would be in their best interest.
    The competitiveness of U.S. insurance companies abroad also raises 
international trade considerations. It is important that we also look 
to the views of another U.S. partner not represented here today--the 
Office of the United States Trade Representative (USTR) which resides 
within the Executive Office of the President. While some people may try 
to separate ``prudential'' (or regulatory) matters from ``trade'' 
matters, in reality, they are closely joined and considered by many to 
overlap.
    Under Dodd-Frank, Treasury and the Board of Governors each has 
certain authorities that are limited to prudential matters involving 
insurance--with trade matters being expressly reserved to the USTR as 
provided under trade statutes. Although USTR is not a member of the FSB 
or the IAIS, it has an important role, as envisioned by Congress, 
especially since international agreements at the FSB may well affect 
market access, directly or indirectly. In this connection, I will note 
that the USTR and U.S. State insurance regulators have worked well 
together over many decades to open markets to U.S. insurers, and have 
done so in a very transparent manner as compared to many international 
processes.
    These international developments that I have briefly noted, help 
explain why many are raising what I consider to be legitimate concerns 
now, ahead of any international commitments being finalized, and why we 
should be cautious about ongoing initiatives by international bodies 
that could be used to influence policy decisions that Congress has 
either expressly delegated to the States, or that are the prerogative 
of the Congress itself. If U.S. Federal Government officials at the FSB 
are to commit, on behalf of the U.S. to implement international 
insurance standards in the U.S., then, given the regulatory structure 
endorsed by Congress, I believe that the outcome of any such commitment 
should be consistent with proven effective State-based regulation and 
that any resulting agreement should contain express reservations 
preserving the discretion as to whether, or how, those standards will 
be implemented in the United States.
    While the negotiation of international insurance agreements may not 
grab headlines that capture the attention of everyday Americans, these 
agreements are nonetheless important to the lives of all Americans, 
given the potentially positive impacts and the risks of unintended 
negative effects on U.S. insurance consumers, as well as the 
consequential benefits and costs to the insurance industry and our 
financial system.
    As negotiations are ongoing, there is still time to ensure that any 
international agreements consented to by the FSB are reached through a 
more open process and are in the best interests of the United States. 
And, as is evident in the holding of this oversight hearing, Congress 
has an important role to play.
    Again, I appreciate the opportunity to appear before you today and 
am pleased to answer any questions you may have. I also stand ready to 
assist the Committee in any way I can as you continue the important 
work of monitoring international developments and improving our 
regulatory framework.
                                 ______
                                 
              PREPARED STATEMENT OF MARK E. VAN DER WEIDE
Deputy Director, Division of Banking Supervision and Regulation, Board 
                  of Governors of the Federal Reserve
                             April 28, 2015
    Chairman Shelby, Ranking Member Brown, and other Members of the 
Committee, thank you for inviting me to testify on behalf of the 
Federal Reserve.
    The Federal Reserve welcomes the opportunity to participate in 
today's hearing, and I am pleased to be joined by my colleagues from 
the Federal Insurance Office (FIO) of the U.S. Treasury, the National 
Association of Insurance Commissioners (NAIC), and the independent 
insurance member of the Financial Stability Oversight Council (FSOC). 
While we each have our own unique authority and mission to carry out, 
we remain committed to working collaboratively on a wide range of 
international and domestic insurance supervisory and regulatory issues.
The Federal Reserve's Role in the Supervision of Certain Insurance 
        Holding Companies
    With the enactment of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act), the Federal Reserve 
assumed expanded responsibility as the consolidated supervisor of a 
significant number of insurance holding companies. As a result of the 
Dodd-Frank Act, the Federal Reserve is responsible for the consolidated 
supervision of insurance holding companies that own an insured bank or 
thrift, as well as insurance holding companies designated for Federal 
Reserve supervision by the FSOC. The insurance holding companies for 
which the Federal Reserve is the consolidated supervisor hold 
approximately one-third of U.S. insurance industry assets and vary 
greatly in size and in the types of products they offer.
    After the passage of the Dodd-Frank Act, the Federal Reserve moved 
quickly to develop a supervisory framework that is appropriate for 
insurance holding companies that own depository institutions and 
promptly assigned supervisory teams to handle day-to-day supervision of 
those insurance holding companies. We also acted promptly to commence 
supervision of the three insurance holding companies designated by the 
FSOC for Federal Reserve supervision. While building our supervisory 
regime for these firms, we have reached out to our colleagues in the 
State insurance departments. Our supervisory teams for insurance 
holding companies are a combination of experienced Federal Reserve 
staff as well as newly hired staff with insurance expertise. The 
Federal Reserve is investing significant time and effort into enhancing 
our understanding of the insurance industry and firms we supervise, and 
we are committed to tailoring our supervisory framework to the specific 
business lines, risk profiles, and systemic footprints of the insurance 
holding companies we oversee. Our supervisory efforts to date have 
focused on strengthening firms' risk identification, measurement, and 
management; internal controls; and corporate governance. Our principal 
supervisory objectives for insurance holding companies are protecting 
the safety and soundness of the consolidated firms and their subsidiary 
depository institutions while mitigating any risks to financial 
stability. \1\ We conduct our consolidated supervision efforts in a 
manner that is complementary to, and coordinated with, State insurance 
regulators, who continue their established oversight of insurance legal 
entities. We do not regulate the manner in which insurance is provided 
by these companies or the types of insurance that they provide. Those 
important aspects of the actual business of providing insurance are the 
province of the relevant State insurance supervisors.
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     \1\ Board of Governors of the Federal Reserve System, Division of 
Banking Supervision and Regulation (2014), ``Incorporation of Federal 
Reserve Policies into the Savings and Loan Holding Company Supervision 
Program'', Supervision and Regulation Letter SR 14-9 (November 7), 
www.federalreserve.gov/bankinforeg/srletters/sr1409.htm.
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The Federal Reserve's Development of Domestic Capital Standards for 
        Insurance Holding Companies
    Congress recently enacted the Insurance Capital Standards 
Clarification Act of 2014 (S. 2270), which amended the provision of the 
Dodd-Frank Act that had required the minimum capital standards for 
banks be applied to any insurance holding company that controls an 
insured depository institution or is designated for Federal Reserve 
supervision by the FSOC. With this amendment to the Dodd-Frank Act, the 
Federal Reserve may now focus on constructing a domestic regulatory 
capital framework for our supervised insurance holding companies that 
is well tailored to the business of insurance. To that end, the Federal 
Reserve has been engaging extensively with insurance supervisors and 
regulated entities to increase our understanding of the regulatory 
capital regime that already applies to insurance companies under State 
laws and to solicit feedback on various approaches to the development 
of an appropriate consolidated groupwide capital regime for insurance 
holding companies that would be consistent with Federal requirements. 
We are exercising great care as we approach this challenging mandate. 
We are committed to following formal rule-making processes to develop 
our insurance capital framework, which will allow for an open public 
comment period on a concrete proposal. We will continue to engage with 
interested parties as we move forward.
The Federal Reserve's Participation in the International Association of 
        Insurance Supervisors (IAIS)
    Some of the insurance holding companies subject to Federal Reserve 
supervision are internationally active firms that compete with other 
global insurers to provide insurance products to businesses and 
consumers around the world. Our supervisory activities for these firms 
include collaborating with our regulatory counterparts internationally 
as well as domestically. As part of this role, in November 2013, the 
Federal Reserve joined our State insurance supervisory colleagues from 
the NAIC and the FIO as members of the International Association of 
Insurance Supervisors (IAIS). Accordingly, the Federal Reserve has been 
and will continue to be engaged in the development of global standards 
for regulating and supervising internationally active insurers. Global 
standard setting is not new to the Federal Reserve, as we have for 
decades participated in standard setting for global banks through our 
membership in the Basel Committee on Banking Supervision. As a general 
proposition, we believe in the utility of having effective global 
standards for regulation and supervision of internationally active 
financial firms. When implemented consistently across jurisdictions, 
such standards help provide a level playing field for global financial 
institutions. Further, consistent global financial regulatory standards 
can help limit regulatory arbitrage and jurisdiction shopping and can 
promote financial stability. We recognize, of course, that 
international regulatory standards cannot be imposed on U.S. firms by 
an international body; rather, these standards apply in the United 
States only if adopted by the appropriate U.S. regulators in accordance 
with applicable rulemaking procedures conducted here.
    Since joining the IAIS in late 2013, the Federal Reserve has been 
an active participant in several key committees, working groups, and 
work streams. We currently hold a seat on the Financial Stability 
Committee and the Technical Committee of the IAIS. Throughout our first 
year-and-a-half as a member of the organization, and consistent with 
our statutory mandate, the Federal Reserve has been particularly 
focused on the financial stability and consolidated supervision work of 
the IAIS. In these tasks, we have worked closely with our U.S. 
partners, including in particular the NAIC and its member supervisors.
IAIS Strategic Priorities
    At the heart of the strategic priorities of the IAIS is the 
development of its Common Framework for the Supervision of 
Internationally Active Insurance Groups (ComFrame). Among other things, 
ComFrame includes the development of a global consolidated capital 
standard for large, complex international insurance companies. A group 
capital requirement for insurers with significant international 
operations is a new concept for U.S. insurance companies. State law 
includes capital requirements for insurance legal entities but does not 
include a groupwide or consolidated capital requirement for insurance 
groups. For the largest and most active global insurers, the Federal 
Reserve supports groupwide consolidated capital standards that are well 
tailored to insurance risks. We also strongly believe such standards 
must be deliberately developed through transparent processes and must 
be properly calibrated.
    A second key focus of the IAIS involves the identification of 
global systemically important insurers (G-SIIs) and the design of an 
enhanced regulatory and supervisory framework for G-SIIs. In 2013, the 
Financial Stability Board, in consultation with the IAIS and using a 
methodology developed by the IAIS, designated a set of nine global 
insurance firms (including three U.S.-based insurers) as G-SIIs. In 
addition to developing enhanced supervision standards and resolution 
planning requirements for G-SIIs, the IAIS continues to refine its G-
SII designation methodology and to work diligently to design loss 
absorbency requirements for G-SIIs.
    Last year, the IAIS released the Basic Capital Requirement (BCR) 
for G-SIIs. It is the first international consolidated capital standard 
developed for the insurance industry. The IAIS developed the BCR to 
help provide a level playing field for the capital adequacy of global 
insurance firms with the largest systemic footprints. The IAIS intends 
to supplement the BCR with a Higher Loss Absorbency (HLA) capital 
standard for G-SIIs. The IAIS expects to release a consultation draft 
on HLA in June with an accompanying request for public comment.
    In time, the IAIS expects that the BCR will be replaced by the more 
detailed and comprehensive Insurance Capital Standard (ICS), which is 
currently under development. Although the ICS likely will apply to a 
broader range of internationally active insurance groups, the IAIS 
expects that the ICS ultimately will also serve as the basis upon which 
HLA capital requirements for G-Slls are applied by the relevant 
national jurisdictions. IAIS began work on the ICS in 2013, issued an 
initial consultative proposal on the ICS late last year, and will 
continue work on the ICS for at least the next few years. This work 
includes the active participation of many volunteer insurance 
companies, including U.S. insurance companies, through field testing of 
various approaches and options, as well as the participation of State 
insurance supervisors and others.
    It is important to note that any standards adopted by the IAIS are 
not binding on the Federal Reserve, the FIO, State insurance 
regulators, or any U.S. insurance company. During the development of 
global standards for insurance firms by the IAIS, the Federal Reserve 
will work to ensure that the standards do not conflict with U.S. law 
and are appropriate for U.S. insurance markets and U.S. insurers. 
Moreover, the Federal Reserve would only adopt IAIS regulatory 
standards after following the well-established rulemaking protocols 
under U.S. law, which include a transparent process for proposal 
issuance, solicitation of public comments, and rule finalization.
Cooperation and Coordination Among U.S. Supervisors, Regulators, and 
        the Industry
    The Federal Reserve, along with the FIO and the NAIC, continues to 
actively engage with U.S. insurance companies on the development of 
global regulatory standards for insurance firms. For instance, the 
Federal Reserve, the FIO, and the NAIC have hosted four separate 
meetings with U.S. participants on the BCR and ICS since August of last 
year. These meetings were distinct and independent of two international 
sessions hosted by the IAIS. Moreover, in the coming months, the 
Federal Reserve, the FIO, and the NAIC are planning additional sessions 
with U.S. insurance firms, consumer groups, trade associations, and 
other interested parties. The Federal Reserve is committed to 
continuing this active level of dialogue and engagement and to 
continuing our work with the FIO and State and international insurance 
regulators to develop a set of standards for global insurance firms 
that is consistent across countries and appropriate for internationally 
active U.S. insurers.
    Nothing in the IAIS work plan, including the group capital 
requirement, seeks to lessen the critical role of individual insurance 
legal entity supervision conducted by the U.S. States and foreign 
countries. Rather, groupwide consolidated supervision and consolidated 
capital requirements supplement this legal-entity approach with a 
perspective that considers the risks across the entire firm, including 
risks that emanate from non-insurance subsidiaries and entities within 
the group. The Federal Reserve is a consolidated holding company 
supervisor that focuses on identifying and evaluating risks, capital 
and liquidity adequacy, governance, and controls across its supervised 
organizations. U.S. insurers with a global footprint or global 
aspirations stand to benefit considerably from a level global 
regulatory framework that is strong but pragmatic. Reasonably 
consistent global insurance standards for internationally active 
insurers and international cooperation among global regulators provide 
the means to that end.
    The Federal Reserve has acted on the international insurance stage 
in an engaged partnership with our colleagues from the FIO, the State 
insurance commissioners, and the NAIC. Our multiparty dialogue, while 
respectful of each of our individual authorities, strives to develop a 
central ``Team USA'' position on the most critical matters of global 
insurance regulatory policy.
    Mr. Chairman, thank you for inviting me here today. I look forward 
to an active dialogue on these issues with you and other Members of the 
Committee.
                                 ______
                                 
                 PREPARED STATEMENT OF MICHAEL MCRAITH
     Director, Federal Insurance Office, Department of the Treasury
                             April 28, 2015
    Chairman Shelby, Ranking Member Brown, Members of the Committee, 
thank you for inviting me to testify today on the state of the 
insurance industry and insurance regulation.
    The Federal Insurance Office (FIO) publishes an annual report to 
address the state of the insurance industry and related regulatory or 
macroeconomic developments. FIO's 2014 Annual Report included sections 
describing (1) a financial overview of the U.S. insurance industry, (2) 
developments and issues with respect to consumer protection and access 
to insurance, (3) regulatory developments, and (4) international 
developments. \1\
---------------------------------------------------------------------------
     \1\ FIO's 2014 Annual Report can be found at http://
www.treasury.gov/initiatives/fio/reports-and-notices/Documents/
2014_Annual_Report.pdf.
---------------------------------------------------------------------------
    Among the highlights, the 2014 Annual Report analyzed data 
demonstrating that, in the aggregate, insurers operating in the United 
States continue to show resilience in the aftermath of the financial 
crisis, including record levels of capital and surplus. At year-end 
2013, the life and health sector (L/H) reported $335 billion in capital 
and surplus, and the property and casualty sector (P/C) reported 
approximately $665 billion in capital and surplus.
    Aggregate net written premiums in the L/H sector declined slightly 
from the record level set in 2012, largely as a result of lower annuity 
sales, whereas P/C sector net written premiums grew modestly in 2013.
    2013 bottom line numbers were encouraging. Record net income levels 
were achieved in 2013 for both the L/H and P/C sectors. The protracted 
low interest rate environment, however, has been a drag on net income, 
particularly for life insurers. To partially mitigate declining 
investment yields, insurers, as a sector, have marginally increased 
asset allocations toward lower rated and less liquid assets with longer 
durations, indicating increased portfolio risks. The L/H sector 
benefited from the performance of separate accounts, and recorded net 
income of $44 billion for 2013, as compared to the previous record high 
of $37 billion set in 2006. Lower catastrophe losses and favorable loss 
development contributed to higher net income for the P/C sector, which 
reached a record $72 billion; the previous high net income was $66 
billion, also set in 2006.
    Per capita premium expenditures are a measure of private insurance 
density, or prevalence, throughout a national economy. On a per capita 
basis, from 2009-2014 insurance premiums for the combined L/H and P/C 
sectors have increased in the United States at an average rate of 1.6 
percent, better than developed economies in Western Europe but less 
than growth rates in fast-developing Asian economies. For example, 
while France's per capita premium expenditure declined by 3.7 percent 
from 2009-2014, China's increased by 13.6 percent.
    Aggregate premiums as a percentage of Gross Domestic Product (GDP) 
are a measure of private insurance penetration in a national economy. 
In 2005, aggregate L/H and P/C premiums amounted to 8.91 percent of 
U.S. GDP, and in 2013 total premiums amounted to 7.51 percent of gross 
domestic product, a decline of 15.7 percent. This indicates that the 
aggregate growth of U.S. premium volume did not maintain the pace of 
growth in GDP. In that same period, developing economies saw an 
increase in private insurance premium volume as a percentage of GDP, an 
indication that developing economies are pursing private capital to 
support retirement security and the protection of personal and 
commercial assets.
    To be sure, the U.S. insurance sector, including those firms that 
are internationally active, has an important role in the national 
economy. Indeed, in the United States, insurance is both local and 
global. Insurers compete in markets throughout the country, underwrite 
risk on a local and personal basis, and consumers have the benefit of 
local support from State regulators.
    The insurance sector, both nationally and globally, is evolving 
dramatically, and we appreciate the opportunity to reflect with you 
upon where the sector is now and where it is going.
    Recent Federal developments are one aspect of change within the 
U.S. insurance sector. In January, Congress passed and President Obama 
signed the Terrorism Risk Insurance Program Reauthorization Act of 2015 
(Reauthorization Act). The Reauthorization Act both renewed and 
reformed the Terrorism Risk Insurance Program (TRIP), and, in Title II, 
reestablished the National Association of Registered Agents and Brokers 
(NARAB). With respect to TRIP, the program includes sensible reforms 
that further reduce taxpayer exposure, increase private sector 
contributions, and support national security and continued economic 
growth. When fully operational, NARAB will serve as a solution to the 
long-standing multistate licensing and administrative burden confronted 
by many insurance agents and brokers.
    Much attention has been devoted to developments in international 
standard-setting in the insurance sector. International insurance 
standard-setting activities are not new. In fact, the National 
Association of Insurance Commissioners (NAIC) was among the founding 
members of the International Association of Insurance Supervisors 
(IAIS) in 1994. Since that time, U.S. State insurance regulators have 
worked to set and meet international standards. Each of the 56 
independent members of the NAIC (50 States, the District of Columbia, 
and five territories) is also a member of the IAIS, and State 
regulators have more votes in the IAIS plenary session (15) than any 
other jurisdiction.
    More recently, since it became a full member in 2012, and 
consistent with its statutory role, FIO has represented the United 
States on prudential aspects of international insurance matters, 
including representing the United States at the IAIS.
    In October 2014, the Board of Governors of the Federal Reserve 
System (Federal Reserve) became a full member of the IAIS. With the 
combined participation of State insurance regulators, the Federal 
Reserve and FIO, all aspects of the unique U.S. insurance oversight 
system are actively engaged at the IAIS.
    When dealing with the IAIS standard-setting work, FIO, the Federal 
Reserve and State insurance regulators work together extensively and 
regularly coordinate. As the U.S. participants of IAIS, the leadership 
and staff of all three groups are in close and meaningful engagement 
through frequent calls and meetings. Our collaboration is a testament 
to the shared objectives of the agencies involved.
    Any discussion of the U.S. insurance sector and its regulation must 
begin with the recognition that the United States has the most diverse 
and competitive insurance market in the world. Thousands of insurers 
operate in the United States, ranging from small mutual companies 
operating in a few rural counties to massive global firms engaged in a 
variety of financial activities. As the Illinois Director of Insurance, 
I learned firsthand about the importance of small and midsize insurers 
to the marketplace and to local and regional economies. Consolidation 
pressures in the small insurer market segment have existed for years, 
but we recognize and want to preserve the important contributions of 
local and regional insurers to consumers and communities.
    Supporting much of this local and global activity is the global 
reinsurance industry--a market with many important participants based 
outside the United States. In fact, based on gross premiums ceded, more 
than 90 percent of the unaffiliated reinsurance of U.S. property and 
casualty insurers is placed with a non-U.S. reinsurer or a U.S. 
reinsurer with a non-U.S. holding company parent.
    In recognition of both the U.S. market and the U.S. system of 
insurance supervision, FIO's international work is guided by three 
priorities: (1) to promote and enhance a competitive U.S. insurance 
market through effective, efficient supervision; (2) to establish 
prudentially sound, equal-footing for U.S.-based insurers to operate 
successfully around the world; and (3) to safeguard financial 
stability.
    At the same time that we support diverse and competitive U.S. 
insurance markets, FIO strongly supports continued growth of the 
increasingly international insurance market and the prudential 
standards that promote consistent and rigorous oversight across 
jurisdictions.
    In the last 10 years, the pace of globalization in insurance 
markets has increased exponentially and is expected to continue to grow 
in the coming years. Insurers based in the United States are pursuing 
opportunities for organic growth in new markets. Aon Benfield's 2014 
Country Opportunity Index, which identifies the world's most promising 
P/C markets, listed five Asian markets among its top ten, in addition 
to three from Africa and two from South America. Even a cursory review 
of the demographics in Brazil, China, India, Indonesia, and South Korea 
demonstrates this point.
    In fact, U.S.-based insurers are extending operations around the 
world, and a growing number expect in the coming years to generate 40 
percent or more of revenue from outside the United States. In addition, 
in 2014, well-known U.S. insurers that are subsidiaries of non-U.S. 
holding companies accounted for more than 13 percent of aggregate L/H 
and P/C premium volume.
    Private market premium volume growth shows that insurers are 
committed to international growth. Measuring global market share by 
aggregate premium volume, from 2008 to 2013, the United States' share 
of the world market declined from 29 percent to 27 percent despite an 
increase in real dollars of more than $32 billion. For the same period, 
China's share increased in real dollars by more than $137 billion and 
as a percentage of the global market from 3 percent to 6 percent. As 
reported in FIO's 2014 Annual Report, South Korea, Brazil, and South 
Africa experienced similar proportional increases.
    These numbers reiterate the message that developing markets present 
important growth opportunities for U.S.-based firms and that growth 
will continue at an increasing rate in the years to come. Growing 
economies around the world seek private sector solutions through life 
insurance products for retirement security and through property and 
casualty insurers for private asset accumulation and protection.
    Due to global economic growth, many jurisdictions--both developing 
and well-established markets--are modernizing insurance supervisory 
regimes. For example, in North America, both Mexico and Canada have 
undertaken sweeping insurance regulatory reforms, just as have 
Australia, China, and South Africa.
    Global supervisors welcome the influx of private capital from 
insurers domiciled in the United States, and elsewhere, and are 
increasingly desirous of a common language and common standards by 
which to understand how a globally active insurer manages risk. These 
supervisors want to know how consumers subject to that supervisor's 
protection fit into the insurer's broader risk management approach. 
This is fundamentally a question of consumer protection: how are 
consumers around the world protected when insurers operate globally?
    As the insurance sector evolves globally, the United States will 
continue to contribute constructively in support of international 
standards that, when implemented, will benefit U.S. consumers, U.S. 
insurers and global financial stability. Working together, U.S. 
participants of the IAIS are already leading developments in 
international standard-setting activities. Absent the participation and 
leadership of U.S. participants, international standard-setting 
activities would continue without reflecting the unique features of the 
U.S. market and regulatory structure.
IAIS Capital Standard Development
    International coordination can be difficult even under the best of 
circumstances. However, through the IAIS, our engagement, communication 
and coordination with other countries has been collaborative and 
productive. This is not to say that we agree with every IAIS member on 
all substantive, technical or procedural issues. Insurance supervisors 
from around the world come together through the IAIS to learn, to 
analyze, to develop and to understand best practices for insurance 
supervision. Each country or region brings its unique perspective and 
predisposition to the conversation, and all have the opportunity to 
learn. The challenge is to find a path to consensus, around practical 
and achievable objectives.
    The development of capital standards at the IAIS dates back to at 
least 2009, with the commencement of a common framework for the 
supervision of internationally active insurance groups, or ComFrame. 
More broadly, and in response to the global financial crisis, G20 
Leaders at recent Summits asked the Financial Stability Board (FSB) to 
develop a policy framework to address the systemic and moral hazard 
risks associated with systemically important financial institutions. In 
response, the FSB, which coordinates G20 financial regulatory 
initiatives, developed a framework and called on the relevant 
international standard-setting bodies to, among other things, develop 
methodologies for identifying globally systemically important financial 
institutions (G-SIFIs) in each financial services industry.
    In July 2013, the FSB called upon the IAIS to develop a backstop 
capital requirement (now known as Basic Capital Requirement, or BCR) by 
2014 for globally systemically important insurers (G-SIIs) and to 
develop in 2015 an approach to higher loss absorbency (HLA) for G-SIIs 
in 2015. These policy measures conform with the G20 endorsed FSB 
framework for systemically important financial institutions, which 
calls for higher loss absorbency for all G-SIFIs. The FSB called upon 
the IAIS to continue development of ComFrame, and to include in 
ComFrame a quantitative insurance capital standard. This comprehensive 
work plan and the related deliverables (including ComFrame, BCR and 
HLA) have been welcomed by G20 Leaders.
    At its 2014 Annual Meeting in October, after more than 12 months of 
data analysis, testing and consultation, the IAIS adopted an approach 
to the BCR. The BCR is the first global group capital standard for the 
insurance sector and provides a simplistic method to measure capital 
within an insurance group across jurisdictions. The BCR will serve as 
the starting point for both the HLA and the insurance capital standard 
(ICS), the latter of which will likely supersede the BCR as the future 
basis for HLA for G-SIIs.
    Development of HLA for the insurance sector presents a significant 
technical challenge. Insurers, the products sold by insurers, and 
existing jurisdictional capital requirements, vary greatly around the 
world. Following months of intense analysis and drafting, the IAIS 
consultation paper on HLA will be released in June for a period of 60 
days.
    With respect to the ICS, the IAIS released a consultation paper in 
December and written comments were received from stakeholders for more 
than 60 days. The consultation paper was highly technical, and 
generated 1,500 pages of comments from stakeholders.
    As publicly described in March 2015, IAIS members agreed on the 
``ultimate goal'' of the ICS which provides a focal point, a guiding 
light, for the technical work that is underway. IAIS members agreed:

        The ultimate goal of a single ICS will include a common 
        methodology by which on ICS achieves comparable, i.e., 
        substantially the same, outcomes across jurisdictions. Ongoing 
        work is intended to lead to improved convergence over time on 
        the key elements of the ICS toward the ultimate goal. Not 
        prejudging the substance, the key elements include valuation, 
        capital resources, and capital requirements. \2\
---------------------------------------------------------------------------
     \2\ The ultimate goal of the ICS can be found in the IAIS's March 
2015 Newsletter and can be found at http://iaisweb.org/
index.cfm?event=getPage&persistId=T347DFD3A5155D896
B001B1CB99C644F78.

    As technical experts from the United States and around the world 
sort through the many complexities of the key elements, the ``ultimate 
goal'' provides the boundaries to shape and influence those 
conversations and the day-to-day developments.
    Given the enormous amount of technical work and the magnitude of 
the global differences, achieving this ``ultimate goal'' will not 
happen quickly. In the near term, building upon data, analysis and 
testing, progress will be made and convergence will improve. 
Importantly, work will proceed incrementally toward milestones that are 
realistic, achievable, and that are fact-driven and consensus-driven.
IAIS Organizational Reform
    IAIS organizational reform has improved its financial independence, 
efficiency and transparency. Formerly, the IAIS charged stakeholders as 
much as $20,400 annually in order to receive the designation of 
``observer'' and thereby receive access to certain meetings, social 
events, and information. Through 2014, the IAIS received approximately 
40 percent of funding from observers--primarily industry--thereby 
creating the appearance of a quid pro quo arrangement that detracted 
from the credibility of IAIS members and stakeholders. Due to the IAIS 
organizational reform, the financial dependence upon industry no longer 
exists.
    At the same time, the IAIS has dramatically improved its engagement 
with and transparency to stakeholders. Perhaps most importantly, the 
IAIS no longer discriminates between stakeholders that pay the fee and 
those that do not. In addition, the following examples illustrate the 
improvements to the IAIS processes for stakeholder consultation:

    In 2014, stakeholder sessions for all IAIS workstreams 
        amounted to less than 12 hours, but in 2015 IAIS stakeholder 
        sessions for all IAIS already amount to more than 60 hours, 
        with more sessions to be scheduled.

    The IAIS Web site will contain information available to the 
        public, not just to stakeholders who pay the annual fee.

    With the launch of a consultation paper, the IAIS will host 
        explanatory meetings and calls so that stakeholders can learn 
        about substance and structure of the document in advance of 
        providing comments.

    After receiving comments on a consultation paper, the IAIS 
        will publish the comments received, release a summary of 
        comments, and offer a reply to the comments.

    For the various work streams (e.g., capital, governance, or 
        market conduct), stakeholder contact lists are being developed 
        so that those stakeholders can provide input to a consultation 
        paper prior to the paper's release for comment.

    Release of a monthly newsletter to describe developments in 
        the preceding month and events scheduled for the coming month.

    While only a few IAIS workstreams were directly open to 
stakeholders before 2015, the new governance and transparency practices 
provide a uniform approach to openness and stakeholder engagement for 
all IAIS activities.
    Finally, U.S. stakeholders have opportunities to meet and work with 
the U.S. participants. Working with State regulators and the Federal 
Reserve, FIO has coordinated opportunities for stakeholders, including 
industry and consumer advocates, to meet and present to all U.S. 
members of the IAIS at one time, thereby enabling the U.S. members to 
receive the views of a wide range of U.S. stakeholders in a U.S.-based 
forum.
EU and U.S. Insurance Project
    The EU and the United States are both significant insurance 
markets. In terms of premium volume, despite the growing prominence of 
developing markets, the EU ranks first and the United States ranks 
second as consolidated markets. The EU and the United States are home 
to many of the world's most prominent global insurers--large 
multinational insurance groups that are pushing more aggressively into 
new markets around the world. The EU is also modernizing its approach 
to insurance regulation through Solvency II, a new EU-wide harmonized 
insurance regulatory regime.
    With these facts in mind, FIO convened the insurance leadership of 
both jurisdictions at Treasury in January 2012. At this initial 
meeting, participants included FIO, State regulators, the European 
Commission, the European Insurance and Occupational Pension Authority, 
and the United Kingdom's Prudential Regulatory Authority. We call this 
the EU-U.S. Insurance Project (Project). State insurance regulators, 
including Commissioners Voss, McCarty and Consedine, among others, have 
made invaluable contributions to the effort. Going forward, we welcome 
the participation of the Federal Reserve in the Project.
    Thanks to the participants, the Project has been a demonstrably 
successful transatlantic collaboration. In September 2012, the Project 
released a report that identified similarities and differences between 
the regulatory approaches in the EU and United States, and, in December 
2012, the Project released an initial Way Forward, which outlined 
common policy objectives and milestones through 2017. Following the 
EU's adoption of Solvency II in late 2013, and the December 2013 
release of FIO's report entitled ``How To Modernize and Improve the 
System of Insurance Regulation in the United States'', continued 
modernization by State regulators, and developments at the IAIS, the 
Project released a revised Way Forward in August 2014 which updated the 
common objectives and milestones. \3\ Of course, as with all such 
international developments, implementation will occur in the United 
States only through Federal and State authorities.
---------------------------------------------------------------------------
     \3\ FIO's report on How To Modernize and Improve the System of 
Insurance Regulation in the United States can be found at http://
www.treasury.gov/initiatives/fio/reports-and-notices/Documents/. The 
Project's revised Way Forward can be found at http://www.treasury.gov/
initiatives/fio/EU-US%20Insurance%20Project/Documents/
The%20Way%20Forward%20(July%20
2014%20Revision).pdf.
---------------------------------------------------------------------------
    A central feature of the Project is work toward a potential covered 
agreement between the EU and the United States. A covered agreement is 
a unique statutory authority given to Treasury and the Office of the 
United States Trade Representative (USTR) to negotiate an agreement 
between the United States and one or more foreign jurisdictions that 
relates only to prudential insurance and reinsurance measures.
    The 2014 Way Forward reiterates Treasury's support for USTR and FIO 
to pursue a covered agreement with respect to State-based reinsurance 
collateral requirements. The 2014 Way Forward also identifies both 
group supervision and confidentiality/professional secrecy as areas for 
which the possibility of a covered agreement should be explored.
    Recently, the EU nations gave the European Commission the 
negotiating mandate to pursue an agreement with the United States that 
will ``greatly facilitate trade in reinsurance and related activities'' 
and ``will enable us . . . to recognize each other's prudential rules 
and help supervisors exchange information.''
    Importantly, a covered agreement must provide tangible benefits for 
U.S. stakeholders. While the mechanics of a covered agreement process 
remain under development, and negotiations with the EU are not 
scheduled, FIO welcomes robust engagement with Congress, State 
regulators, and other stakeholders on the opportunity presented by a 
covered agreement.
Conclusion
    Through effective collaboration at home and abroad, U.S. insurance 
authorities are positioned to provide U.S. leadership that complements 
the shared interest in a well-regulated insurance market that fosters 
competition, promotes financial stability, and protects consumers.
    Importantly, it bears repeating that, in all of our work, both 
internationally and domestically, our priorities will remain in the 
best interests of U.S. consumers, U.S. insurers, the U.S. economy, and 
jobs for the American people.
    We welcome the chance to work with this Committee and its excellent 
staff, and look forward to more discussions on these important topics.
    Thank you for your attention. I look forward to your questions.
                                 ______
                                 
                 PREPARED STATEMENT OF KEVIN M. MCCARTY
Commissioner, Florida Office of Insurance Regulation, on behalf of the 
            National Association of Insurance Commissioners
                             April 28, 2015
Introductory Remarks
    Chairman Shelby, Ranking Member Brown, and Members of the 
Committee, thank you for the opportunity to testify today. My name is 
Kevin McCarty, and I am the Insurance Commissioner for the State of 
Florida. I am also a past President of the National Association of 
Insurance Commissioners (NAIC) and serve as the Chair of the NAIC's 
International Insurance Relations (G) Committee. I present this 
testimony on behalf of the NAIC.
    The NAIC is the United States standard-setting and regulatory 
support organization created and governed by the chief insurance 
regulators from the 50 States, the District of Columbia, and five U.S. 
territories. Through the NAIC, we establish standards and best 
practices, conduct peer review, and coordinate our regulatory 
oversight. NAIC members, together with the central resources of the 
NAIC, form the national system of State-based insurance regulation in 
the U.S.
    Insurance is critical to the U.S. economy and plays an equally 
important role in global markets. The U.S. insurance market is the 
largest and most competitive in the world, with $1.8 trillion in 
premium volume and thousands of insurers writing policies. State 
insurance regulators supervise nearly a third of all global premium, 
and taken individually, U.S. States make up more than 24 of the world's 
50 largest insurance markets. My home State of Florida, for example, is 
the 12th largest insurance jurisdiction worldwide by premium volume. To 
help put that in perspective, the Florida market for insurance is about 
the same size as Canada's market, about 50 percent larger than 
Australia's market, and nearly twice as large as Switzerland's market 
for insurance. As U.S. State insurance regulators who cooperate closely 
on a regular basis, we have long been committed to providing leadership 
on a wide range of global insurance issues and activities, with a focus 
on ensuring policyholder protections and maintaining stable and 
competitive insurance markets.
    As discussions move forward regarding the development of domestic 
and global capital rules, State insurance regulators continue to oppose 
imposing a one-size-fits-all bank-centric set of regulations on 
insurers and instead focus on the importance of company and product 
specific analysis and examination. While insurer capital requirements 
are important, such requirements are not a substitute for the other 
tools in the regulatory tool box and, if imposed incorrectly, can be 
unnecessarily onerous to the company and ultimately harmful to the 
policyholder. We are concerned that taking a uniform regulatory 
approach that treats insurers more like banks may actually encourage 
new risk-taking in the insurance industry. The NAIC and its members 
remain extensively engaged with our Federal and international 
counterparts to ensure that our national State-based system has a 
prominent voice in the development and implementation of domestic and 
global capital standards and that they are adaptable to our markets and 
benefit our consumers.
Distinguishing Characteristics of Insurance Products and U.S. Insurance 
        Regulation
    The fundamental tenet of our U.S. system is to protect 
policyholders by ensuring the solvency of the insurer and its ability 
to pay insurance claims. Insurance companies are different from other 
financial institutions and from each other. There is a large amount of 
variability in insurance products. The insurance regulatory system is 
purposely flexible to address the depth and breadth of these 
differences. While insurance policies involve up-front payment in 
exchange for a legal promise to pay benefits upon a specified loss-
triggering event in the future, banking products involve money 
deposited by customers and are commonly subject to withdrawal on 
demand. The very nature of insurance significantly reduces the 
potential of a run-on-the-bank scenario for property/casualty, health 
and most life insurance products. For those limited products sold by 
insurers that could be subject to some level of run risk, mitigating 
factors exist such as policy loan limitations, surrender/withdrawal 
penalties, and additional taxes. Additionally, insurers typically 
maintain a diverse product mix so only a portion of the company's 
products would be subject to the already reduced level of run risk.
    Insurance products, unlike banking products, do not transform short 
term liabilities into longer term assets. Insurance has shorter 
duration liabilities in many of the property/casualty and health 
product lines, and the assets held are similarly short term. Insurance 
has longer duration liabilities in life and annuity product lines, and 
these liabilities are matched against similarly longer term assets. 
This is a critical distinction from banking and other financial 
products. A key reason many other financial firms suffered during the 
financial crisis was that the duration of their assets and liabilities 
were not matched in a way that enabled them to fund their liabilities 
when they came due.
    It is important to design regulation that best recognizes and 
addresses the differences in products and the financial institutions 
that offer them while providing the appropriate level of protection for 
policyholders. State insurance regulators want to make certain that 
insurance policyholders' assets are protected when an insurer operates 
within a large, diverse financial group. That is why State insurance 
regulators strongly support The Policyholder Protection Act (S. 798) to 
clarify our existing authority to wall off the insurance legal entity 
from contagion elsewhere in the group. It is critical that the 
regulatory walls around legal entity insurers that have protected 
policyholders for decades remain intact regardless of an insurer's 
organizational structure or financial circumstance.
Federal Reserve Capital Rules Should Be Appropriate for the Insurance 
        Business Model
    Given the different business models and regulatory objectives 
between banking and insurance, State insurance regulators want to 
ensure that any new capital standards at home or abroad appreciate 
these distinctions. We are keenly aware of the many complicated 
considerations involved in setting capital standards appropriate for 
insurers, and are committed to assisting the Federal Reserve in its 
efforts to implement capital rules for savings and loan holding 
companies (SLHCs) and insurers that are designated systemically 
important financial institutions (SIFIs) by the Financial Stability 
Oversight Council. It is important to keep in mind that these standards 
are in addition to, and not in lieu of, State risk-based capital 
standards applicable to the insurers within those groups, so we would 
encourage the Federal Reserve to work closely with us to ensure their 
standards complement our existing regulatory authority. We supported 
the passage of the Insurance Capital Standards Clarification Act last 
year to give flexibility to the Federal Reserve to tailor its capital 
rules for these companies. We are hopeful that the Federal Reserve will 
utilize this flexibility to apply capital rules to these entities that 
are consistent with the insurance business model and our legal entity 
regulation and we are committed to assisting them in this important 
endeavor. We have had some constructive initial conversations with them 
and look forward to continued discussions in the future.
Global Capital Standards for Insurers Should Be Compatible With the 
        U.S. System
    In addition to the regulatory changes occurring domestically, it is 
important to note that changes are occurring internationally at the 
same time. The International Association of Insurance Supervisors 
(IAIS) is simultaneously developing capital proposals primarily to 
address systemically important firms, but also new requirements on 
internationally active groups that are not deemed too big to fail, 
including many firms based in the U.S. As part of the policy measures 
recommended for application to globally systemically important insurers 
(G-SIIs), the IAIS has moved rapidly, under specific direction and 
pressure from the Financial Stability Board (FSB), to develop 
international standards for a basic group capital requirement (BCR) and 
additional higher loss absorbency (HLA) capital measures (capital 
buffers) that would be imposed on firms that are deemed too big to 
fail.
    In addition, the IAIS is developing a global insurance capital 
standard (ICS) as part of a Common Framework for the Supervision of 
Internationally Active Insurance Groups (ComFrame). State insurance 
regulators are concerned about the development of international capital 
standards for the insurance industry as well as the process and speed 
with which the IAIS has been developing them. We have serious concerns 
about the aggressive timeline of developing a global capital standard 
given legal, regulatory, and accounting differences around the globe, 
but are fully engaged in the process to ensure that any development 
appropriately reflects the risk characteristics of the underlying 
business and does not undermine legal entity capital requirements in 
the U.S.
    The NAIC's objective is to ensure that the capital proposals 
developed at the IAIS are reasonable and compatible with our system. We 
must also ensure they don't inadvertently lead to unintended 
consequences such as limiting insurance products or stagnating growth 
in the insurance sector, including jobs and innovation. If tailored for 
our regulatory system, there is value in understanding the capital 
adequacy of insurance groups, particularly when part of a larger 
conglomerate or affiliated with other entities. But that value only 
exists if it supplements and wraps around our existing legal entity 
standards. We also remain concerned with the more volatile market 
valuation accounting approach favored by Europe as an international 
standard because it represents a short-term focus rather than a longer-
term view and could have a negative impact on the U.S. market to the 
detriment of American insurance consumers.
    In our view, taking a more homogenous regulatory approach that 
treats insurers more like banks may actually encourage new risk-taking 
in the insurance industry. Also, if the new standards are excessive or 
too inflexible, then they could increase costs on U.S. insurers and 
consumers and undermine the U.S. State-based insurance regulatory 
system, which is based on protecting policyholders and has a strong 
track record of effective solvency supervision and stable, competitive 
insurance markets. The IAIS must recognize that a system that has 
existing safeguards and controls to supervise the movement of capital 
within a group may take a different approach to capital adequacy at the 
group level than jurisdictions that do not have similar requirements. 
The IAIS objectives on capital standards are not easily achievable and 
will require a significant commitment of resources over many years to 
ensure that they are compatible with the U.S. system of insurance 
regulation as well as with other jurisdictions around the world.
    Of crucial importance to the international discussions will be the 
Federal Reserve's implementation of capital rules. But let me be clear, 
while the Federal Reserve has its responsibilities, we have our own. 
Most of the Internationally Active Insurance Groups (IAIGs) that will 
potentially be subject to the ICS are not SLHCs or SIFIs that are also 
regulated by the Federal Reserve. To that end, while we are committed 
to collaborating with our Federal and foreign counterparts where we 
can, we still have a responsibility to the U.S. insurance sector. We 
will not implement any international standard that is inconsistent with 
our time-tested solvency regime that has provided long-standing 
protection to policyholders and ensured a competitive and stable U.S. 
insurance marketplace.
Inclusive and Transparent Decision-Making Process Is Critical to 
        Effective Regulation
    Critical to the credibility of decision making at the IAIS is an 
inclusive and transparent decision-making process. It is difficult to 
achieve optimum regulatory outcomes or reach broad consensus about 
international standards without the input of those most affected, in 
particular the consumer we protect and the industry we regulate. That 
is why State insurance regulators adamantly opposed efforts at the IAIS 
to limit stakeholder engagement. We continue to believe the IAIS's 
decision represents a step back for the openness and transparency 
necessary to give IAIS work credibility and legitimacy, particularly if 
and when legislative bodies are expected to consider IAIS proposals. 
The IAIS has new stakeholder and consultation procedures in place and 
State regulators participating at the IAIS will assess the 
effectiveness of these new procedures and continue to advocate for 
increased transparency, and will urge other U.S. IAIS members to 
support this worthy goal.
    We remain equally concerned with the lack of transparency at the 
Financial Stability Board. While we appreciate the role of the Federal 
Reserve, Treasury, and the Securities and Exchange Commission as 
members of the FSB, State insurance regulators supervise 100 percent of 
the private insurance market in the United States and to date have had 
only limited access into FSB discussions directly relevant to our 
sector. This direct participation has only occurred as a representative 
of our international standard setting body, the IAIS, and not after 
requesting inclusion from our own U.S. FSB representatives. 
Particularly given the role of the FSB in designating three U.S. 
insurers as globally systemically important insurers, we find the lack 
of support for our inclusion at the FSB by our Federal colleagues 
troubling and not reflective of the best interests of U.S. insurers and 
policyholders. In light of the significant influence the FSB has on the 
IAIS, it is important that the entire ``Team USA'' be involved in 
insurance related discussions at the FSB.
    For our part, the NAIC has long-standing procedures and ongoing 
responsibilities to seek input from policyholders and other interested 
parties, and we will continue working on these issues in a transparent 
manner through our NAIC process. To that end, last year, the NAIC 
formed the ComFrame Development and Analysis (G) Working Group (CDAWG), 
which I chair, to provide ongoing review, and technical as well as 
expedited strategic input on ComFrame and the international group 
capital developments. In addition, the CDAWG has been exploring group 
capital concepts that would be appropriate for U.S. based 
internationally active insurance groups.
    Most recently, the CDAWG helped review the first IAIS Consultation 
Draft on the ICS, which was issued in December 2014. State insurance 
regulators provided comprehensive feedback to the IAIS regarding the 
elements of the proposed ICS such as valuation and potential methods 
for determining capital requirements. The NAIC is currently working 
through its open and public process to update its position statements 
on ComFrame and international capital developments with input from 
consumer and industry stakeholders. These documents serve to articulate 
the views of U.S. State insurance regulators toward the uses of capital 
within prudential regulation and help guide our ongoing work regarding 
IAIS capital proposals. As we work to affirm and update our positions, 
we welcome these additional perspectives to further enhance the focus 
of our regulatory priorities. We expect to finalize these positions 
shortly and will share them with the Committee.
Conclusion
    U.S. insurance regulators have a strong track record of effective 
collaboration and supervision, and the NAIC is committed to 
coordinating with our Federal and international counterparts to help 
ensure open, competitive, and stable markets around the world. It is 
critical that we promote a level playing field across the globe through 
strong regulatory systems while recognizing that there will continue to 
be different cultural, legal, and operational differences in regulatory 
regimes around the world. Consistency in regulation globally is 
important, but preserving regulatory independence and diversity of 
thought can also serve as a buffer against contagion or one-size-fits-
all behaviors by financial firms that can result from one-size-fits-all 
regulatory approaches. Congress has delegated insurance regulatory 
authority to the States so we have a continuing obligation to engage 
internationally in those areas that impact the U.S. State-based system, 
companies, and consumers. U.S. State insurance regulation has a strong 
track record of evolving to meet the challenges posed by dynamic 
markets, and we continue to believe that well-regulated markets, both 
here and abroad, make for well-protected policyholders. Thank you again 
for the opportunity to be here on behalf of the NAIC, and I look 
forward to your questions.
        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                    FROM S. ROY WOODALL, JR.

Q.1. Mr. Woodall, in regards to the international capital 
standards being developed and the historical differences 
between the U.S. and European approaches, stated, ``When you 
try to harmonize those two, you're creating the potential for 
great disruption in the delivery of different services in the 
marketplace, a potential raise in prices for consumers in the 
United States and potentially jeopardizes the availability of 
products.''
    Does this mean you see the potential imposition of 
international capital standards on State-regulated insurers as 
disrupting our Nation's insurance markets and having a negative 
impact for U.S. customers?

A.1. Yes, potentially.
    The upcoming introduction of capital directives from 
foreign organizations without any legal basis to promulgate 
regulations directed toward U.S. insurers, coupled with any 
implicit Federal commitments to impose such standards if not 
agreed to or otherwise endorsed by our State regulators, is 
inconsistent with our Congressionally chosen domestic system of 
prudential regulation of insurance companies. Beginning with 
the McCarran-Ferguson Act, and reaffirmed in the Gramm-Leach-
Bliley Act and the Dodd-Frank Act, Congress has affirmatively 
entrusted the States and the State insurance regulators with 
the safety and soundness of insurance companies and the 
protection of consumers of insurance. Congress should consider 
whether the scope of Federal efforts to develop and coordinate 
Federal policy on international insurance prudential matters 
has gone too far in displacing authorities that Congress has 
reserved to the States and State regulators.
    The current pursuit of these types of international 
agreements has been occurring in an atmosphere of secrecy that 
is an anathema to our U.S. principles of openness, 
transparency, and oversight. Given that I, just like many 
members of Congress, am not fully informed as to what capital 
standards may lay ahead--yes, I am concerned about the 
potential negative impacts that may follow from imprudent, 
hurried and untested capital directives coming not from our own 
State insurance regulators, but rather from foreign 
organizations and foreign regulators who have a weak 
understanding of the fundamentally different basis on which the 
U.S. insurance regulatory system operates.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                    FROM S. ROY WOODALL, JR.

Q.1. The historic role for international financial regulatory 
organizations was limited to fostering a dialogue between 
regulators and serving as a platform for cooperation between 
Governments. To me, it appears that mission has been greatly 
expanded. Today, these organizations issue rules that 
effectively bind their participants' national Governments to 
new, internationally negotiated rules.
    As a legislative body principally charged with fair and 
efficient regulation of industry, isn't Congress right to be 
concerned that recent mission creep at these international 
organizations is resulting in regulatory decisions that do not 
have the input of their elected representatives?
    Should we consider refocusing the mission of international 
organizations on facilitating cooperation amongst regulators?

A.1. Yes.
    Congress is right to be concerned about ongoing efforts by 
foreign organizations that could be used to mandate changes in 
decisions that Congress has left to our regulators, or that 
have been reserved for Congress itself to decide. Such concerns 
should not be limited to insurance regulation. U.S. financial 
market regulation is apparently also in the sights of such 
foreign entities. Several Commissioners at the Securities and 
Exchange Commission, for example, have been outspoken about 
this threat.
    Putting aside any debate as to how much influence the 
various foreign organizations do, or should, have over our 
domestic regulatory policies, I think we would all agree that 
international fora can play an important role in regulatory 
coordination given the global interconnections of the financial 
system. However, when such bodies by themselves decide to 
assume a position of primacy with the domestic regulatory 
policies of sovereign countries, including the U.S., even if 
such efforts are well intentioned, a concern will exist that 
the effort has gone awry. In my opinion, it is very important 
that Congress consider a clear statutory framework for: (1) 
fuller U.S. participation at these various foreign 
organizations; (2) the appropriate parameters of such 
participation so as to align with the domestic regulatory 
authorities established by Congress; and (3) the requisite 
level of reporting to Congress and transparency with the 
public.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM MICHAEL MCRAITH

Q.1. Director McRaith, currently there is a lot of discussion, 
given GE's recent divestment, around the SIFI de-designation 
process. If we assume there is a robust de-designation process 
that is set up by the Financial Stability Oversight Council 
(FSOC), the three current insurance companies designated as 
nonbank SIFIs make the appropriate changes to their businesses 
to become de-designated, and any insurance companies that own 
or are affiliated with a bank or thrift sell that bank or 
thrift.
    Under this scenario, can you tell me what insurance 
companies the Federal Reserve would have regulatory authority 
(or standard-setting authority) for?

A.1. The Federal Reserve is responsible for the supervision of 
an insurer that is a bank holding company, savings and loan 
company, or is a part of either a bank holding company or 
savings and loan holding company, subject to certain 
conditions, and for an insurer that is designated by the 
Financial Stability Oversight Council (Council) to be subject 
to supervision by the Federal Reserve and enhanced prudential 
standards. The Council's process for annual review allows any 
designated company to present information for the Council to 
consider when determining whether that company's designation 
should be removed. Importantly, the Federal Reserve Board will 
determine the extent to which it will be involved in standard-
setting activities which may, in fact, be independent of its 
regulatory role.

Q.2. How many staff members do you have that participate in or 
work with either the Financial Stability Board (FSB) or the 
International Association of Insurance Supervisors (IAIS)? What 
are their names? What is the exact role that each of them play 
with either one of or both organizations? (Please provide a 
detailed list.) Are these full time positions? Who pays the 
salaries of these employees? How much money does your 
organization contribute or provide to the FSB? How much money 
does your organization contribute or provide to the IAIS?

A.2. FIO has 15 full-time employees, each of whom contributes 
to the work of the Office, including international matters. FIO 
staff are Treasury employees and are paid by the Treasury. FIO, 
through Treasury, pays an annual fee to the IAIS which, for 
2015, was approximately $17,225.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                      FROM MICHAEL MCRAITH

Q.1. Will you work with the State insurance regulators to gain 
consensus between the Federal Insurance Office, the Federal 
Reserve and the National Association of Insurance Commissioners 
(NAIC) before agreeing to an international capital standard? 
Would you support an international capital standard that is 
opposed by the NAIC?

A.1. As required by law, FIO coordinates efforts to develop 
Federal policy on prudential aspects of international insurance 
matters, including on matters related to a global capital 
standard. This collaborative work with State insurance 
regulators and the Federal Reserve occurs many times each week 
at both the leadership and staff levels. Given FIO's own 
collaborative practices, and that State insurance regulators 
are active participants in the IAIS's consensus-driven 
deliberations, the potential for an outcome related to an 
international capital standard that is not supported by the 
State insurance regulators is very unlikely. Further, 
international standards are not self-executing. Each country 
implements international standards in a manner tailored to that 
country and its regulatory regime. In the United States, once 
developed, international capital standards are expected to be 
tested and then--only after testing--implemented at the Federal 
and State level.

Q.2. The historic role for international financial regulatory 
organizations was limited to fostering a dialogue between 
regulators and serving as a platform for cooperation between 
Governments. To me, it appears that mission has been greatly 
expanded. Today, these organizations issue rules that 
effectively bind their participants' national Governments to 
new, internationally negotiated rules.
    As a legislative body principally charged with fair and 
efficient regulation of industry, isn't Congress right to be 
concerned that recent mission creep at these international 
organizations is resulting in regulatory decisions that do not 
have the input of their elected representatives?
    Should we consider refocusing the mission of international 
organizations on facilitating cooperation amongst regulators?

A.2. The financial crisis demonstrated many things including 
that (1) the insurance sector is an integral part of capital 
markets and the financial sector, and (2) the economies of 
different countries are increasingly connected. Further, in 
recent years, insurers based in the United States and elsewhere 
are finding opportunities for organic growth in new markets and 
developing economies. For these reasons, international 
insurance standard-setting activities involve technical 
subjects and are not limited to relationship building. 
International standard-setting activities promote global 
financial stability and equal footing for U.S. insurers 
operating around the world.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM KEVIN M. MCCARTY

Q.1. Commissioner McCarty, in regards to the international 
capital standards being developed and the historical 
differences between the U.S. and European approaches, stated, 
``When you try to harmonize those two, you're creating the 
potential for great disruption in the delivery of different 
services in the marketplace, a potential raise in prices for 
consumers in the United States and potentially jeopardizes the 
availability of products.''
    Does this mean you see the potential imposition of 
international capital standards on State-regulated insurers as 
disrupting our Nation's insurance markets and having a negative 
impact for U.S. customers?

A.1. Yes, that is a real potential and that is why State 
insurance regulators are working to ensure that the capital 
proposals developed at the International Association of 
Insurance Supervisors are reasonable and compatible with our 
system. We want to ensure that bank-centric standards based on 
mark-to-market accounting don't inadvertently lead to 
unintended consequences such as limiting insurance products or 
stagnating growth in the insurance sector, including jobs and 
innovation. If these standards are excessive or too inflexible, 
then they could increase costs on U.S. insurers and consumers 
and undermine the U.S. State-based insurance regulatory system, 
which is based on protecting policyholders and has a strong 
track record of effective solvency supervision and stable, 
competitive insurance markets. If tailored for our regulatory 
system, there is value in understanding the capital adequacy of 
insurance groups, particularly when part of a larger 
conglomerate or affiliated with other entities. But that value 
only exists if it supplements and wraps around our existing 
legal entity standards.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                     FROM KEVIN M. MCCARTY

Q.1. The historic role for international financial regulatory 
organizations was limited to fostering a dialogue between 
regulators and serving as a platform for cooperation between 
Governments. To me, it appears that mission has been greatly 
expanded. Today, these organizations issue rules that 
effectively bind their participants' national Governments to 
new, internationally negotiated rules.
    As a legislative body principally charged with fair and 
efficient regulation of industry, isn't Congress right to be 
concerned that recent mission creep at these international 
organizations is resulting in regulatory decisions that do not 
have the input of their elected representatives?

A.1. Yes. We agree the role of international standard-setting 
organizations has evolved significantly since the financial 
crisis from facilitating cooperation and sharing best practices 
to advancing ``mandates'' and sometimes insisting on 
prescriptive ``requirements'' that do not always have the full 
consensus of participating jurisdictions. Efforts of the 
International Association of Insurance Supervisors (IAIS) and 
the Financial Stability Board (FSB) are ostensibly under the 
auspices of the G20, and there are clear expectations and 
pressures to implement key standards regardless of whether they 
fit with a particular jurisdiction's system and irrespective of 
legislative authority to do so. While it's true these standards 
are not self-executing, the IAIS is leveraging the support of 
the FSB to expand its impact on domestic regulatory rulemaking 
and put pressure on jurisdictions to comply. Congress has an 
important role to play in overseeing the international 
insurance roles and policy objectives of the Treasury and the 
Federal Reserve, since both are deeply engaged in the decisions 
of the Financial Stability Board and the IAIS.

Q.2. Should we consider refocusing the mission of international 
organizations on facilitating cooperation amongst regulators?

A.2. Multijurisdictional cooperation and sharing of best 
practices can help elevate the quality of insurance regulation 
around the globe, and this will help promote more stable and 
competitive markets for our U.S. insurance companies operating 
internationally. At the same time, it is imperative that 
international organizations recognize that there will continue 
to be different cultural, legal, and operational differences in 
regulatory regimes around the world, and that uniform standards 
are not necessary to achieve compatibility and equivalent 
results. International standards should be flexible enough to 
deal with these structural and legal differences to avoid 
putting insurers, and by extension consumers, at a disadvantage 
in one market relative to another. As a practical example, a 
current reform underway in the State system is to reduce 
collateral required of foreign reinsurers. Reduction of this 
collateral is contingent on the foreign reinsurer's domestic 
regulator being deemed a ``qualified jurisdiction'' by the 
NAIC. The NAIC has quickly made these assessments to establish 
full faith and confidence that our U.S. ceding insurers are 
doing business with a well-regulated reinsurer, and at no time 
have we asked any of the foreign jurisdictions to overhaul 
their regulatory systems to look more like ours or to follow 
some prescribed standard. That type of flexibility to foster 
trust and collaboration while respecting our differences is 
exactly what we should expect from international regulatory 
standard setters.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
                     FROM KEVIN M. MCCARTY

Q.1. I understand that the Federal Insurance Office (FIO), the 
Federal Reserve, and the National Association of Insurance 
Commissioners (NAIC) have frequent communication and 
participate in number discussions and calls on international 
insurance standards.
    As a result of these ongoing discussions, does the NAIC 
have a clear sense of what the Federal Reserve's and FIO's 
specific views and objectives are for the development of 
international capital standards?

A.1. We have received very little in writing or on public 
record, and there is significant room for improvement. 
Communication and coordination among Federal agencies and State 
insurance regulators is essential to fostering a collaborative 
U.S. approach to international standard-setting activities at 
the International Association of Insurance Supervisors (IAIS) 
and the Financial Stability Board (FSB). While we appreciate 
the current levels of communication with FIO and the Federal 
Reserve, and we certainly exchange views on some matters, we do 
not have a clear picture of their policy objectives or level of 
commitment to ensure that U.S. Federal policy is consistent and 
compatible with our State-based system. The U.S. insurance 
sector, including company and consumer stakeholders, is 
handicapped because U.S. State insurance regulators are not 
engaged directly with the FSB on insurance matters, and because 
of the FSB's lack of transparency and the recent retreat from 
open sessions at the IAIS. We would encourage more transparency 
across the board from the international standard-setting 
organizations and the U.S. Federal Government agencies in 
activities relating to international insurance standards.

Q.2. Do State insurance regulators through the NAIC articulate 
their views on international capital standards to FIO and the 
Federal Reserve?

A.2. Yes, we do. U.S. State insurance regulators are committed 
to providing an open and inclusive forum through the NAIC that 
provides transparency into the development of our policy 
positions and has proven effective for many years. We believe 
it is important to articulate our views on international 
capital standards not only to our Federal colleagues, but also 
to the larger stakeholder community. That is why we have been 
engaged in an open and public process with our Federal 
colleagues, industry, and consumer stakeholder through our 
ComFrame Development and Analysis Working Group (CDAWG) to 
update our position statements on ComFrame and international 
capital development. These public documents are posted on our 
NAIC Web site and serve to articulate State insurance 
regulators' views toward the uses of capital within prudential 
regulation and help guide our ongoing work regarding IAIS 
capital proposals.
              Additional Material Supplied for the Record
 LETTER FROM BENJAMIN M. LAWSKY, SUPERINTENDANT OF FINANCIAL SERVICES, 
 NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES, SUBMITTED BY SENATOR 
                                 BROWN
                                 
                                 
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

EXAMPLES OF INCENTIVES FOR ANNUITY BROKERS, SUBMITTED BY SENATOR WARREN

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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