DEPARTMENT OF THE TREASURY 

FEDERAL INSURANCE OFFICE (FIO) 

FEDERAL ADVISORY COMMITTEE ON INSURANCE (FACI) 

MINUTES - 23 SEPTEMBER 2019 

The Federal Advisory Committee on Insurance (F ACD convened at 1 :30 pm on 23 September 

2019 in the Media Room at the U.S. Department of the Treasury, 1500 Pennsylvania Ave. NW, 

Washington, D.C., with Dan Glaser, Chair, presiding. 

In accordance with the Federal Advisory Committee Act, the meeting was open to the public. 

Committee Members Present 

DAN GLASER, Chief Executive Officer, Marsh & McLennan 

ERIC ANDERSEN, Co-President, Aon 

NANCY ATKINS, Commissioner, Kentucky Department of Insurance 

AMY BACH, Executive Director, United Policyholders 

BIRNY BIRNBAUM, Executive Director, Center for Economic Justice* 

QUINCY BRANCH, Chief Executive Officer, Branch Benefits Consultants 

GREG CRABB, President & CEO, Amerisure* 

JILLIAN FROMENT, Director, Ohio Department of Insurance 

GEORGE KEISER, Representative, North Dakota House of Representatives 

JIM KELLEHER, Executive Vice President and Chief Legal Officer, Liberty Mutual 

TOM LEONARDI, Executive Vice President and Vice Chair AIG Life Holdings, Inc., AIG 

SEAN MCGOVERN, General Counsel, AXA XL 

ANDREW STOLFI, Administrator, Oregon Division of Financial Regulation* 

KENT SULLIVAN, Commissioner, Texas Department of Insurance (by proxy, LUKE 

BELLSNYDER) 

BILL WHEELER, President, Athene 

*Present via teleconference 

Also Present 

BIMAL PATEL, Assistant Secretary, Financial Institutions, Treasury 

TYLER WILLIAMS, Deputy Assistant Secretary, Financial Institutions Policy, Treasury 

STEVEN SEITZ, Director, Federal Insurance Office (FIO) 

LINDSEY BALDWIN, Senior Policy Analyst, FIO (Designated Federal Officer) 

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Welcome and Introduction 

Chairman Glaser welcomed three new committee members: Jillian Froment, Director, Ohio 

Department of Insurance; Nancy Atkins, Commissioner, Kentucky Department of Insurance, and 

Tom Leonardi, Executive Vice President and Vice Chair of AIG Life Holdings, AIG. 

Chairman Glaser welcomed Treasury representatives Tyler Williams, Deputy Assistant 

Secretary, Financial Institutions, Policy and Steven Seitz, Director, Federal Insurance Office 

(FIO). 

Chairman Glaser summarized the activities of the last public meeting. The meeting was held via 

teleconference and each of the three subcommittees ( on the Availability of Insurance Products, 

FIO's International Work, and Addressing the Protection Gap Through Public-Private 

Partnerships and Other Mechanisms) developed an initial work plan. Following that meeting, 

each of the subcommittees held phone calls. 

Chairman Glaser outlined the meeting agenda. First, Director Seitz would provide a summary of 

FIO's activities. Next, each subcommittee's co-chairs would provide an update and the FACI 

would discuss each subcommittee's work. Finally, if any of the subcommittees presented 

preliminary advice and recommendations to F ACI, the full committee would discuss those 

preliminary recommendations in detail and decide which recommendations (if any) to present to 

FIO. 

Update on Federal Insurance Office Activities 

Director Seitz summarized his September 2019 testimony given before the Senate Committee on 

Banking, Housing, and Urban Affairs, which related to developments in global insurance 

regulatory and supervisory forums. He said that in his testimony, he emphasized the importance 

of the federal government's participation in international forums to ensure that international 

standards do not inappropriately affect U.S. insurance companies or the U.S. market. He also 

highlighted the equal importance ofFIO's continued coordination with the rest of Team USA: 

state regulators, the NAIC, and the Federal Reserve. At the testimony, Director Seitz reaffirmed 

Treasury's commitment to supporting the insurance capital standard's (ICS) overall objective of 

working to create a common language for supervisory discussion but reiterated Treasury's 

concerns about certain aspects of ICS development. 

The first concern regarded Treasury's work to improve the design of the ICS so that it more 

appropriately reflects the business model of insurers. He said Treasury has identified has 

identified as an issue the ICS's market valuation approach and the negative effects it could have 

on the ability of insurance companies to provide long-term savings products, which are important 

to insurers and policyholders in the United States. Director Seitz added that the ICS needs to 

appropriately consider long-term savings products that are critical to Americans entering 

retirement. 

Second, Director Seitz said that Treasury believes it is important for the IAIS to create a defined 

structure and process for further work and revisions on the ICS during the five-year monitoring 

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period (2020 to 2024). He added that any ICS version 2.0 will most likely need further 

development and revision. Therefore, the IAIS needs to develop a process that ensures 

appropriate confidentiality for insurers during the five-year monitoring period, while allowing 

the IAIS, its members, and other important stakeholders to continue evaluating, revising, and 

improving the ICS. Director Seitz stated that Team USA must remain closely and actively 

engaged during this period, and advocate for U.S. interests so that U.S. insurers remain 

competitive overseas, and international standards do not have inappropriate effects at home. 

Third, Director Seitz said it is important that the IAIS strengthen its efforts to develop a final ICS 

that is implementable in the United States. He said Treasury is focused on working with its 

Team USA colleagues and the broader membership of the IAIS to develop the criteria and 

process by which the U.S. approach to group capital may be deemed outcome equivalent. 

He said FIO will continue to advocate that the IAIS increase its focus on enhancing compatibility 

of the ICS with the U.S. system. 

Director Seitz concluded his discussion of this topic by saying that getting the ICS right at the 

IAIS is more important than meeting a fixed schedule that mandates completion of the project at 

a specific point in time. 

Director Seitz then discussed the expected adoption of the holistic framework at the upcoming 

IAIS meetings in Abu Dhabi in November 2020. He said that implementation by IAIS members 

is expected in 2020. Director Seitz said that Treasury supports shifting the focus of systemic risk 

analysis away from individual insurance entities and toward the activities of insurers and other 

market participants. Treasury also supports the efforts of the IAIS to improve the standards for 

liquidity management and planning. 

Director Seitz provided an update on the EU-U.S. Covered Agreement. He said that the U.S. 

states, through the NAIC, have amended the Credit for Reinsurance Model Regulation as a basis 

for the states to conform their laws to the commitments made in the EU-U.S. Covered 

Agreement. He said that FIO has been monitoring this process and engaging with state 

regulatory colleagues to have each state conform its laws to the U.S.-EU Covered Agreement. 

He added that in the coming months, FIO will be asking both the NAIC and NCOIL to assist in 

this by providing FIO with real-time status information on the state law and regulation 

amendment process. Director Seitz said this information will assist FIO in meeting the U.S. 

obligation to encourage the states to act expeditiously, and also allow FIO to prioritize its federal 

steps and enable FIO to keep the EU up to date on developments in the United States. 

Director Seitz discussed recent FIO reports delivered to Congress. In early September 2019, 

Treasury and the Federal Reserve issued a joint report to Congress summarizing FIO's work at 

international standard-setting bodies. This report included discussions about the efforts of Team 

USA with respect to the ICS and the holistic framework. In June 2019, Treasury published a 

study of Small Insurer Competitiveness in the Terrorism Risk Insurance Marketplace. This study 

found that small insurers are significant participants in the U.S. market for terrorism risk 

insurance, although their market share has slightly decreased over the last decade. 

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Director Seitz said that FIO continues to be mindful of the upcoming expiration of the Terrorism 

Risk Insurance Program on December 31, 2020, and the Advisory Committee on Risk-Sharing 

Mechanisms met in August 2020 to discuss the development of advice and recommendations 

related to this Program. He added that the Advisory Committee on Risk-Sharing Mechanisms 

would be holding a public meeting on September 30, 2019. 

Director Seitz discussed the August 2019 publication of the National Mitigation Investment 

Strategy by FEMA. The mitigation strategy included input from a variety of national 

stakeholders, and recommended actions that stakeholders can take related to disaster resilience. 

Director Seitz said that the Mitigation Strategy provides an opportunity for nationwide 

coordination around mitigation investment and disaster resilience. FIO was involved in drafting 

of the mitigation strategy and will be involved with implementation efforts going forward. 

These implementation efforts will involve a variety of partners, including federal agencies, state, 

territorial, tribal and local governments, and private, and non-profit sector entities such as 

businesses, foundations, universities, and other non-governmental organizations. 

Director Seitz confirmed that FIO would be releasing its annual report at the end of September 

2019. This report provides a financial overview of the insurance sector and highlights insurance 

issues as well as FI O's work in 2018, and the first half of 2019. He added that FIO would 

highlight the topic-0f InsurTech in the report, following meetings with over three dozen 

stakeholders to hear viewpoints on issues related to InsurTech. Based on this outreach, Director 

Seitz said that the report will provide a market overview, assess current innovations and the 

impact they are having on the insurance sector, and discuss regulatory topics related to the 

current regulatory structure, including sandboxes, data use and privacy, and RegTech. Director 

Seitz added that FIO will continue to monitor developments and evaluate whether to put forth 

InsurTech recommendations in its 2020 annual report, or in other forms as appropriate. 

Director Seitz discussed work of the federal government's Long Term Care Interagency Task 

Force, which held a public meeting on July 25, 2019 as part of its stakeholder outreach. The 

Task Force also invited the public to submit written comments by October 30th, 2019. Director 

Seitz said that the Task Force would review these comments along with data, research and 

published materials from public and private sources, and expects to issue a written report with its 

findings and recommendations in late 2019 or early 2020. 

The Committee had no questions or comments for Director Seitz. 

Update from Subcommittee on Addressing the Protection Gap Through Public-Private 

Partnerships and Other Mechanisms 

Chairman Glaser reminded members that the subcommittee is chaired by Sean McGovern of 

AXA XL and Chairman Glaser. At the June 2019 public meeting, this subcommittee decided to 

focus on topics related to the P&C sector, and specifically to examine protection gap topics 

related to natural disasters. 

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Chairman Glaser said that since that time, the subcommittee has held two conference calls to 

define the protection gap, design a set of strategies to mitigate the protection gap, and compile a 

set of recommendations on ways to address the protection gap through coordinated, public, 

private partnerships. The subcommittee distributed a draft PowerPoint presentation to members 

of the Committee to provide more detail on these topics. 

Mr. McGovern said that the subcommittee approached the work on this subject from a levelsetting perspective, seeking to understand the issue of the protection gap, to size the challenge, 

and then develop recommendations together with thoughts on some of the challenges in 

implementing those recommendations. He added that the conversation about resilience and 

mitigation was also timely in the context of the UN Climate Summit, which was occurring 

simultaneously. He added that the issue requires action at every level, including the individual 

level, where behavioral issues and transparency affect the protection gap. At the government 

level, there is a need for coherent policy framework, at the national, state, and local levels. The 

government can also help provide better data to both the insurance industry and individuals, 

which could help size and increase understanding of risks. Mr. McGovern added that the 

insurance industry has a role to continue to innovate, provide meaningful capacity, incentivize 

the right behavior and mitigation work with the federal government, and work on private market 

solutions. 

Mr. McGovern said that the subcommittee defined the protection gap as the gap between the 

insured and actual economic losses caused by large scale catastrophic events. The subcommittee 

focused primarily on the P&C space, and in particular issues relating to flood, earthquake, wind, 

and wildfires. Research publications (by the industry and others) show significant insured losses 

at both the global and domestic level, but much more significant economic losses. Mr. 

McGovern noted there is an opportunity to try to close this gap. 

Mr. McGovern first addressed the importance of understanding the cause of the protection gap 

before trying to address it, to identify where risk could be avoided or mitigated. After this was 

done, the subcommittee looked at mitigation solutions to understand its challenges and how to 

change consumer behavior. Finally the subcommittee looked at areas with a clear possibility for 

the insurance industry to take on risk that currently sits with the federal government. 

Mr. McGovern said that the subcommittee concluded that a significant cause of the protection 

gap relates to consumer behavior, resulting from a lack of consumer understanding about 

exposure, a lack of consumer education, and a lack of consumer understanding. However, the 

protection gap is also driven by economic factors and matters of affordability. 

Mr. McGovern said the subcommittee concluded that the insurance industry needs to improve 

both consumer education and policymaker education, which allows informed decisions to be 

reached at both at the individual level and the government level. He added there is a need to 

provide data to consumers so they can understand their exposures. 

5 
In its focus on flood, earthquake, wildfire and wind risks, the subcommittee received a 

presentation on the National Mitigation Investment Strategy, which has the goal of creating a 

combined mitigation strategy that involves the federal government, industry, and individuals. 

Mr. McGovern summarized the goals identified by the subcommittee (many of which align with 

the investment strategy). First, there is an obligation to educate and ensure that people 

understand the relevance of mitigation in their communities. There is a need to build grassroots 

support for community action. There is also a need to publicize what works well to expand 

implementation. There is also a need to educate policymakers to help them foster 

implementation. 

Information sharing and access to risk information is very important for consumers and the 

industry. Having granular and up-to-date data allows the insurance industry to assess better risk 

and deploy capital. 

Mr. McGovern added there is a need to streamline mitigation funding down to a local level. 

There is also a role for the government and industry to create financial incentives. While the 

government can create tax benefits and subsidies, the industry can apply the fundamentals of 

insurance to ensure that people properly manage risk, and drive down overall exposure and cost. 

The fourth goal related to standard setting, enforcing building codes, and enforcing zoning and 

critical infrastructure. Mr. McGovern said that these fundamentals of building and zoning must 

be clear and enforced or the problem will continue to worsen. 

The final goal related to effective use of traditional solutions, which requires the industry to 

continue to drive take-up of insurance products and be innovative in creating solutions that will 

be used at the individual level. So this is where the industry needs to continue to play its part to 

drive take up in insurance products and try and be an innovative as possible with solutions that 

can be absorbed and used both at the individual level and community level (e.g., microinsurance 

or parametric products). The industry should also adapt to technology in product design and 

transparency. 

Mr. McGovern then summarized the subcommittee's discussion of challenges related to 

implementing these goals. First, although there is a need to increase risk-based pricing to 

encourage the right behavior and recognize higher risk areas, doing so will exacerbate take-up 

and affordability issues. He also noted challenges in improving data accessibility for the 

industry, as well as improving and enforcing building codes. The subcommittee also identified 

the need for an increased focus on mitigation for all hazards ( as opposed to the current focus on 

extreme tail risks), because people are more often impacted by smaller events. Proposals around 

mandatory insurance and mandatory offerings also creates challenges. Mr. McGovern noted that 

many of these challenges involve influence the right kind of consumer behavior. 

Mr. McGovern discussed programs that currently transfer insurance risk to the federal 

government. The GAO recently counted as many as 148 such federal programs, and the 

subcommittee believes there is an opportunity to provide additional private market capital to 

6 
these risks. Mr. McGovern acknowledged the opportunity to learn lessons from successful 

programs and understand how private market capacity has been deployed (whether through 

reinsurance-type solutions or deployment of bonds). 

Chairman Glaser welcomed Assistant Secretary Bimal Patel to the meeting before inviting the 

Committee to provide comments on the subcommittee's presentation. 

Ms. Bach complimented the work done by the subcommittee so far, and encouraged the 

subcommittee to incorporate lessons· learned/best practices from the state level related to 

mitigation funding. She highlighted the Florida's property assessed clean energy (PACE) 

programs, California's Brace and Bolt program, innovations by the Institute for Home and 

Business Safety related to fortification against wind and water, and state efforts related to 

wildfire. 

Ms. Bach identified challenges for individuals not understanding what they can do to reduce risk, 

how they can pay for mitigation, and who they can hire to perform the work. She highlighted the 

importance of individuals feeling like they have made an investment that paid off (whether 

because their insurance premium went down or they were able to keep their insurance). 

Ms. Bach acknowledged that there is not an expectation that insurance will cover everything but 

stressed the importance of restoring financial integrity to basic insurance coverage. The industry 

should not only help people understand their exposure, it should restore consumer confidence 

that insurance will provide the money they need. Ms. Bach acknowledged the difficulty in the 

industry relaying this message, but highlighted the decline in take-up rate of flood insurance on 

Long Island following Superstorm Sandy. She said that local officials she spoke with said that 

people didn't get paid because they didn't reach their deductibles (or heard others complaining) 

and there was a loss of confidence in the program. She added that media strategy will also be 

important, as many media stories now tend to focus on individuals who are disappointed or 

frustrated by their insurance. 

Mr. Kelleher asked if the subcommittee would be looking at the constraints that seem to be 

holding back the development of a private flood insurance market, given that only one percent of 

people outside flood zones purchase insurance even though 50 percent of losses occur in those 

areas. Mr. McGovern responded that the subcommittee would take Mr. Kelleher's comment 

under advisement, although added the subcommittee is approaching its work incrementally and 

wants to examine systemic issues rather than trying to immediately fix certain perils. 

Mr. Glaser noted that the private insurance market is heavily involved with providing flood 

insurance to the commercial market, whereas homeowners and small commercial insurance is 

essentially built around the NFIP program. He highlighted a July 2019 regulatory change which 

encouraged mortgage servicers to consider private insurance products in the same way that they 

would consider an NFIP policy (thereby removing the requirement for a homeowner to have an 

NFIP policy), which will likely result in growth of the private market. He added that the 

subcommittee believes it is unacceptable for the number one peril in the United States to be 

7 
underinsured/uninsured when modeling has improved and policyholder surplus levels are near 

all-time highs. 

Mr. Keiser said it is imperative that the Committee understand the variables within the NFIP in 

order to address the problem. As an example, he said that in North Dakota (and many other 

states), many homes have basements, but he believes flood insurance doesn't cover basement 

flooding from groundwater. 

Mr. Keiser said that the use of"3P" is becoming more attractive to states to deal with natural 

disasters, because they don't have the capacity for bonding and taxation is high. 3P is seen as an 

easy route, however in terms of transparency it is unclear how much more expensive a 3P is 

versus bonding. Mr. McGovern replied that although this is a relevant question, the 

subcommittee is more focused on the type of mitigation planning as opposed to the source of 

funding, so this might be difficult for it to address. 

Mr. McGovern asked Director Seitz three questions. First, whether FIO could use its convening 

power to help the subcommittee learn about the NFIP's experiences and success with building 

reinsurance capacity. Second, whether a connection should be made between FIO and the work 

of the Insurance Development Fund (IDF) related to the protection gap in emerging market 

economies. Third, what thoughts FIO has about the best way to engage the industry in the work 

of the Mitigation Strategy. Director Seitz replied that the Mitigation Strategy has set up a series 

of task forces to proceed with implementation, and FIO is participating in these task forces. He 

said that FIO's convening power could be helpful with respect to the Mitigation Strategy as well 

as de-risking programs, noting that approximately 18 months ago, prior to adoption of the 

Mitigation Strategy, FIO held a roundtable with FEMA and NOAA, and it was a good 

opportunity for the insurance sector to look at issues from FEMA's perspective. Finally, 

Director Seitz said that FIO has been approached in the past about participating in the IDF, and 

the IDF is now working in partnership with the IAIS. He added that the IDF is looking at the 

work of the NAIC and the sates, and considering how IAIS can contribute. 

Mr. Andersen suggested that the IDF is focusing on using the tools that exist in the U.S. model 

but trying to apply it in places where there are no models, private market, or expertise. He said 

this raises an interesting problem, as the U.S. is struggling with this issue even though it has 

these tools. 

Mr. Andersen suggested that the subcommittee should discuss the need to frame insurance 

products in a more understandable way, noting that many of the member comments made during 

the meeting came up in terms of understanding the products being purchased and risk-based 

pricing. Ms. Bach suggested a public information campaign that would be federally supported 

and coordinated with the states. She added that entities with statutory mandates seem to·be the 

source of innovation for mitigation efforts ( e.g., the FAIR Plan) and it might be beneficial to start 

by helping residual markets (which arguably have the worst risks and could innovate on 

mitigation support, financial systems, and implementation). 

8 
Update from the Subcommittee on FIO's International Work 

Mr. Leonardi, co-chair of the subcommittee on FIO's international work, said that the 

subcommittee developed recommendations in three areas. First and most significant was the 

Insurance Capital Standard (ICS) currently under development at the IAIS. Second was the 

evolving IAIS approach to the Holistic Framework (systemic risk assessment within the 

insurance sector). The Holistic Framework will increasingly deploy an activities-based approach 

(ABA) rather than the current entities-based approach (EBA) which has taken the form of the 

G-SII designation framework. Third was market access issues for U.S. insurance groups 

operating globally. Mr. Leonardi noted that most of the subcommittee's proposed 

recommendations at this meeting would focus on the ICS and IAIS-related issues given 

upcoming milestones related to the ICS (specifically, the IAIS annual meeting taking place in 

Abu Dhabi in November). The proposed recommendations were also submitted to the 

Committee in writing. 

Mr. Leonardi said that the recommendations on ICS focused first on the importance of continued 

strong collaboration across the members of Team USA: FIO, the NAIC, state commissioners, 

and the Federal Reserve, as relates to the negotiations at the IAIS. 

Second, the subcommittee recommended establishing a viable pathway to international 

acceptance of aggregation. This effort should be the key priority for Team USA and should 

encompass two key elements: 1) outreach and education on the NAIC's development of its 

aggregation construct, and 2) a well-specified IAIS public communications about the way 

forward, including detailed work plans and timelines, and realistic and achievable criteria for 

assessing comparability. Mr. Leonardi added that, contingent on the outcome of the IAIS 

meeting, FIO and its Team USA partners should consider issuing a public statement to both 

reassert and clarify the U.S. position on the way forward. 

Third, the subcommittee recommended developing a coherent design and candid framing of the 

monitoring period, which in addition to concrete work plans on comparability and achieving 

IAIS acceptance of the aggregation approach, should also specify that ICS 2.0 is a work in 

progress and may be subject to substantial changes before final implementation. Mr. Leonardi 

added that the five-year monitoring period (beginning in 2020) should not simply be a phase-in 

for ICS 2.0 to become a prescribed capital standard in 2025, but rather an opportunity to assess 

the validity of the standard, and address issues with the standard before implementation takes 

effect ( of note, the appropriate recognition of a long-term guarantee business remains a key area 

of ongoing development). The subcommittee also recommended that both the form and timing 

of the ICS 2.0 implementation should be subject to the results of a public consultation process, 

and market impact studies to be conducted during the monitoring period and focused on impacts 

on financial stability, the macro-economy, and consumers. Mr. Leonardi also stated that in the 

context of these uncertainties and concerns, any ICS 2.0 reported by companies during the 

monitoring period should not be indicative of capital positions, and could well misrepresent a 

company's financial strength. 

9 
Mr. Leonardi provided additional context for these recommendations, because the forward 

pathway on ICS in the United States depends in large part on the pathway for acceptance of 

aggregation. As core elements of its advocacy for aggregation, the subcommittee proposed that 

FIO and Team USA should highlight the following: 

• The significant work achieved by the NAIC's Group Capital Calculation Working Group 

since its inception several years ago. The working group has conducted multiple 

consultations, open hearings, and quantitative field testing. 

• The Federal Reserve's recently published proposal as an example of an implementable 

aggregation construct. 

• The NAIC, unlike the Federal Reserve, currently has standard-setting authority for 

internationally active U.S. insurers. As a result, the NAIC's aggregation approach should 

be operative basis of comparability at the IAIS. 

• The prudential benefits of the aggregation-style approach in reflecting the primacy of 

entity-level jurisdictional requirements in how the industry manages capital. 

• The value proposition of an aggregation-style approach in providing greater insight into 

legitimate similarities and differences across various local regimes, which is an issue that 

has long vexed supervisors and analysts, and therefore merits further study and attention 

via the aggregation work. 

• The importance of jurisdictional flexibility as a key tenet of prudential oversight and 

tailoring of insurance regulations to local markets and circumstances. 

• The unproven and untested nature of the ICS 2.0, including design issues, concerns about 

the validity of best efforts valuations, and the potential for pro-cyclicality across 

changing market environments. 

In terms of the standards and substance for the comparability assessment of U.S. aggregation, the 

subcommittee recommended that the following framework be utilized for determining the 

comparability of any jurisdiction's group capital assessment regime applicable to internationally 

active insurance groups (IAIGs): 

• The primary criteria for assessing the comparability of a group capital assessment regime 

should be whether it provides a comparable level of policyholder protection and 

contributes to global financial stability. 

• A comparability determination should not be based on whether the regime achieves 

equivalent quantitative outcomes to the ICS. Rather, the proper focus of a comparability 

determination should be whether the group capital assessment regime, in conjunction 

with other available supervisory measures, ensures substantially the same supervisory 

outcomes as part of coordinated solvency oversight. 

• A comparable group capital assessment regime should also include a worldwide group 

capital calculation, capturing risk at the level of the entire group, including the worldwide 

parent, undertaking of the insurance or reinsurance group, which may affect the group's 

insurance or reinsurance operations and activities. 

• A comparable group assessment of capital regime should also recognize and value all 

material liabilities and capital resources in a consistent, objective and reliable manner. 

10 
• The group-wide supervisor should also have the authority to impose preventive, 

corrective, or otherwise responsive measures on the basis of the group capital assessment, 

including requiring, where authorized, capital measures, as a result of the group capital 

assessment. 

• A group capital assessment must not undermine existing jurisdictional capital 

requirements. 

Mr. Leonardi then summarized the subcommittee's proposed recommendations relating to the 

holistic framework for assessing potential systemic risk. He said that the subcommittee 

applauded FI O's efforts in helping to spearhead the development of the IAIS holistic framework 

for systemic risk, which creates a pathway for an ABA to serve as the primary basis of 

identifying, monitoring, and addressing potential systemic risk within insurance. The 

subcommittee recommended a continued focus on the following five substantive themes: 

• Promoting a true cross-sectoral ABA, which places insurance within the proper context 

of financial services more broadly. 

• Ensuring that macro-prudential surveillance does not become a monolithic, 

over-engineered data mining exercise. The subcommittee wished to caution against an 

overreliance on a purely data-driven approach to surveillance, which could distract from 

meaningful qualitative analysis and dialogue around emerging risks. 

• Ensuring that the IAIS approach does not overtly single out or discriminate against U.S. 

insurance products, particularly well-established products such as annuities that play an 

important role in U.S. retirement planning. 

• Deferring to local supervisors as the primary and accountable authorities for systemic risk 

oversight. Jurisdictional supervisors are closer to developments and risk factors in local 

financial markets, and can more readily collaborate with their financial services 

supervisory peers to ensure a cross-sectoral approach. 

• Implementing the ABA based on a principle of proportionality, by focusing on an 

insurer's exposure to potential systemically-risky activities. Proportionality should focus 

on activities that should be in scope, not on a defined list of covered companies. In scope 

activities should have a demonstrable linkage to financial risk factors, and should not 

cover uncorrelated risks such as cyber and catastrophe, risks which, while meaningful in 

the enterprise risk management perspective, are not pertinent to illiquidity-driven market 

disruptions and macro-prudential financial surveillance. 

Mr. Leonardi said that the subcommittee recommended that, regarding market access issues, 

F ACI should identify and study situations in which jurisdiction-specific solvency measures are 

exported through upstream applications, foreign direct investment limitations, post-mandatory 

tender offer sell-down requirements, limitation of benefit restrictions, and affiliate reinsurance 

cession restrictions. The subcommittee also noted that there are other, non-insurance specific 

measures that are intended (or have the impact) to restrict market access or otherwise treat 

foreign companies differently. Among these measures are unreasonable data transfer restrictions 

and data center location requirements. The subcommittee proposed that this study should 

11 
determine which jurisdictions that FIO (in coordination with Treasury and the USTR) should 

prioritize in its engagement on market access. 

Chairman Glaser confirmed that the subcommittee was providing F ACI with recommendations 

in three categories: the ICS, the Holistic Framework for systemic risk assessment, and market 

access. Mr. Leonardi noted that the market access recommendations were less defined, being 

less time-sensitive than the other two topics. 

Mr. Kelleher commented that it seems imperative for Team USA to receive a clear statement 

from the IAIS at Abu Dhabi indicating that the insurance group capital standard assessment and 

the aggregate approach are deemed appropriate to ICS. He added that with respect to the 

Holistic Framework, the complementary roles of local supervisors should be clearly defined, 

because he thinks it is important that the IAIS does not take on the role of a global systemic risk 

supervisor. He added that mission creep should be avoided, and activities should be delineated 

as in or out of scope to avoid the risk of sweeping activities within the exercise that have no 

place in the process. 

Mr. Birnbaum asked what the EU's objections are to the U.S. aggregation method. Mr. Leonardi 

responded that, based on his conversations with members of the EU, EIOPA, and the IAIS 

Executive Committee, the objections have been related to the perception that the NAIC really 

isn't working on an aggregation system or construct, rather than the substance of the method. 

However, the NAIC has been working on this system for approximately three years, primarily 

through the Group Capital Calculation Working Group. Due to the importance of having an 

outward marketing strategy, the NAIC converted the (G) Committee meeting into an open 

hearing ( at the March 2019 meetings in Orlando) to facilitate robust discussion on the impacts of 

aggregation, ICS, and the implications to industry. This was also done at the August 2019 NAIC 

summer meeting in New York. Mr. Leonardi added that AIG was involved in both ICS field 

testing as well as field testing of the aggregation method. Director Seitz added that there are 

other technical issues that European colleagues find concerning. For example, one system uses a 

consolidated group focuses with a market evaluation approach while another uses a legal entitystate based system, and there are also issues related to capital resources ( e.g., the way debt is 

issued, contractually subordinated, or structurally subordinated). As a result, working through 

these technical issues is important as is education. 

Mr. Birnbaum noted that Mr. Leonardi referenced comparability in terms of whether group 

capital provides the same solvency oversight and financial stability effectiveness, rather than in 

terms of capital equivalence. He asked how could this standard be assessed proactively (i.e., 

absent a catastrophic financial event). Mr. Leonardi responded that he had spoken on this issue 

extensively as a state commissioner and (G) Chair as well as on the IAIS Executive Committee, 

and has noted that at times the capital standard is sometimes a solution looking for a problem. 

He suggested that if there had been a robust supervisory college at AIG in 2006 and 2007 (rather 

than an extensive amount of capital), it is quite possible that this would have prevented the 

concentrations of risk that were occurring in the securities lending and financial products 

divisions. He said that a supervisor's ability to use "all of the tools in the toolbox" is far more 

important than simply having a capital standard. 

12 
Mr. Birnbaum agreed that capital is not the solution to everything, but asked for clarification as 

to how this factor relates to the demand for a comparability standard that uses something other 

than equivalent outcomes. Mr. Leonardi replied that the NAIC has taken a very strong position 

that the capital construct doesn't work for the U.S. system, Secretary Mnuchin made this point in 

his speech at the NAIC International Forum in May 2019, and Governor Quarles (chair of the 

FSB) has also clearly stated it does not work for the U.S. system. Mr. Leonardi also noted that 

43 senators (from both parties) endorsed Governor Quarles's letter. Mr. Leonardi said that these 

statements support the fact that a version of comparability should allow for the recognition that 

different jurisdictions have different products, different legal systems, and therefore one size 

does not fit all. 

Mr. Birnbaum asked Mr. Leonardi to outline the principal differences in capital and the reserve 

requirements for annuities and investment type life insurance between the EU and the U.S. 

systems that are prompting concern about products in the U.S. Mr. Leonardi replied that when 

he served on the IAIS Executive Committee, variable annuities were viewed as non-traditional 

non-insurance, and made up 40 percent of an entity's systemic risk score (more than an entity's 

size or global reach). Mr. Leonardi stated that that variable annuities have been sold in the 

United States only by insurance companies for over 50 years, and it was therefore a misnomer to 

call them non-traditional non-insurance. In addition, the United States has a robust private sector 

solution for retirement security, and U.S. policymakers are trying to determine how to broaden 

private market solutions to avoid burdening the public sector's finances in supporting retirement. 

Mr. Leonardi said many European countries take a different approach to retirement, and 

therefore don't have a need for these products and don't sell these products. He said the market 

consistent valuation aspect of creating volatility for these long-term products can last 40 to 60 

years. In asset liability management, an entity is trying to match its long-term assets to its longterm liabilities, so if the entity has to mark to market every quarter (particularly in times of 

stress), it creates tremendous volatility. Many companies therefore decide they can't afford the 

volatility, and therefore do not offer these retirement products. This creates a public policy 

problem because the public sector can't unilaterally handle retirement security but the private 

sector is pulling back. 

Mr. Birnbaum replied that he finds implausible the argument that the EU has designed a 

regulatory system that discourages annuities and long-term investment type life insurance 

because its members have robust public pension systems and therefore they don't need these 

products. He added that these type of products have been sold in Europe for a long time, and it 

seems that the reason that the Europeans developed a solvency framework around those products 

is because those products have the potential for creating a financial stability risk. He suggested 

that there is a need for much closer scrutiny of the capital and reserve programs in the U.S. for 

these product, because that they do have the potential to pose financial stability risk. Mr. 

Leonardi disagreed with the concept that variable annuities are as widespread in Europe as they 

are in the United States, stating that he has not seen data supporting this. 

Director Seitz responded to Mr. Birnbaum by noting that Team USA is actively engaged in the 

technical aspects of the ICS development, and is looking at a number of issues, such as how the 

current discount rate is used, the long-term forward rate, and how liabilities are bucketed in the 

13 
three bucket approaches. He said that these discounting factors are driving punitive effects to 

long-term life insurance players, and Team USA is working to address this. 

Mr. Birnbaum asked which data transfer provisions are unreasonable in terms of market access. 

Mr. Leonardi said that countries have various views on the privacy of data. Most insurer 

operations involve data stored in the cloud, so if a jurisdiction requires data to be in a localized 

data center in their country, that data can get locked down. This creates a problem for 

multinational companies operating in many countries. Putting a data center in every country 

creates additional expenses and creates unfair competition compared to local insurers. In 

addition, having numerous different data centers is less secure than having one concentrated data 

center. Mr. Leonardi added that the customer experience may also diminished because they are 

not able to access the cloud. 

Mr. Keiser moved that the recommendations developed by the subcommittee would be formally 

be presented to FIO by F ACI. Mr. Kelleher seconded the motion. All members present 

supported the motion. 

Update from the Subcommittee on the Availability of Insurance Products 

Chairman Glaser confirmed that Mr. Keiser replaced Ms. Bach as Co-Chair of the Subcommittee 

on the Availability of Insurance Products. 

Mr. Keiser reported that the subcommittee had received an update from FIO staff on the 

Interagency Task Force created by the 2017 Treasury report, A Financial System that Creates 

Economic Opportunities: Asset Management and Insurance. The task force is led by Treasury's 

Economic Policy office and includes representatives from the Department of Health, Human 

Services, Office of Management and Budget, Department of Labor, the Centers for Medicare and 

Medicaid Services, and the Internal Revenue Service. The task force was created to discuss the 

state of the long-term care insurance industry and how the industry can be restored. 

The task force held a public session with stakeholders (including NAIC and state regulatory 

representatives) and invited members of the public to comment on their business by 5:00 p.m. on 

August 30th. Mr. Keiser added that the NAIC has identified ten federal policy changes that 

Congress could consider to increase private long-term financing consumer options. The NAIC 

would be coming forward with its recommendations in time for the OSSA meeting in December 

2019. Mr. Keiser said the subcommittee decided to withhold its discussion on long-term care 

until it can view the work products resulting from these activities. 

Mr. Keiser provided an update about the subcommittee's state-related discussions on long-term 

care. He said that states vary in the way they manage long-term care. Some states, like North 

Dakota, have equalized billing (which enables an individual to pay the same amount through 

Medicaid or private payment). Most states have non-equalized billing, where private payments 

subsidize Medicaid payments. This can create a problem for states, because as the cost of private 

payment increases, more individuals must rely on Medicaid. 

14 
Mr. Keiser also emphasized the importance of the federal medical assistance percentage (FMAP) 

score for Medicaid, which is assigned to each state (based on the state's financial condition) and 

determines the proportion of Medicaid payments that will be made by the state versus federal 

government. As an example, Mr. Keiser noted that North Dakota's current FMAP is 49/51, so 

for every dollar spent on Medicaid, 49 cents comes from North Dakota and 51 cents comes from 

the federal government. He added that this has resulted in rapidly-growing Human Services 

budgets in each state. 

Mr. Keiser discussed recent developments by the NAIC wherein both health and life insurance 

groups were combined to support state guaranty funds for insolvencies related to long-term care. 

However, he said the fund would operate different from a traditional guaranty fund, wherein if a 

line of insurance experienced an insolvency, other companies in the line absorbed the insolvency 

and any individuals who lost coverage were picked up and had their premium subsidized by the 

fund in some manner. In this agreement, insurers would be permitted to offset their guarantee 

fund payments through a credit on their premium taxes (which ultimately impacts a state's 

general funds). 

Mr. Keiser also discussed the Deficit Reduction Act (Partnership Act) which was intended to 

facilitate portability of long-term care plans when a policyholder moves to another state. 

However, plan rates are extremely different across states, and it is difficult to make a policy truly 

portable when it hasn't been adequately funded for a different level of risk in another state. He 

said North Dakota created legislation modeled after the Indiana legislation which has been 

passed twice and signed by the governor of North Dakota, but CMS will not grant the state a 

waiver. Mr. Keiser expressed his hope that the Committee can delve into problems associated 

with the Partnership Act. Mr. Keiser also suggested that the underlying problem with long-term 

care insurance is that participation needs to increase among younger individuals. 

Mr. Keiser expressed his hope that the subcommittee would be able to examine these issues 

going forward along with the outcomes of the work being performed by the long-term care task 

force and the NAIC. 

Ms. Bach commented that she received a call from a reporter saying that a policyholder had 

reported a 100 percent increase in her long-term care premium (from $300 to $600), which the 

insurer was due to increased aggregated policyholder costs. She suggested that the difficulty in 

pricing the product seems to be at the core of the matter. 

Mr. Wheeler asked Mr. Keiser if the task force's study would diagnose why the private longterm care market has disappeared. He suggested it is important to understand why the market 

went away before it is possible to encourage its return. Mr. Wheeler proposed the following 

reasons for the disappearance of the private market: the policies were written in a different time 

and we are now in an environment with extraordinarily low interest rates. Following the 

financial crisis, risk managers began to recognize a significant interest rate risk in selling 

traditional long-term care policies. These low interest rates have led to extraordinary premium 

increases. He said that this issue can be solved if more state insurance departments allow price 

increases, rather than having some states that agree and others that always refuse. Mr. Wheeler 

15 
also questioned whether high interest rates would return and if interest rates could become even 

worst. He added that long-term care products need to be redesigned and changed for the private 

market to be revived. 

Mr. Keiser agreed that legacy plans are in trouble and may not be salvageable long-term, but the 

guaranty fund system will hopefully manage them over time. He added that 15 years ago, about 

1 12 entities sold long term care insurance, but today only 1 1-12 entities sell these policies. The 

market has somewhat corrected by selling modified products that work through annuities or 

other combinations of life insurance. 

Mr. Birnbaum suggested that the long-term care market has gone away because products were 

underpriced significantly when they were introduced in the 80s and the 90s, and insurers sold 

these products on a cash flow basis. He added that the Center for Economic Justice (CEJ) 

suspects there was some fraud involved, but insurers also created a problem by moving more 

favorable/profitable customers to new blocks. He said that one of the key issues facing 

regulators is how much responsibility a shareholder of an insurance company has for the 

company's pricing mistakes, versus the responsibility of the consumer who was promised the 

stable premiums over the life of the product. He also added that the CEJ's view is that the 

traditional long term care product is defective and there shouldn't be any public resources to 

support it. 

Mr. Birnbaum suggested that products offered in the current marketplace are not "really" 

long-term care products because they are limited in duration and strongly limited in benefits. 

They are structured this way because that is the only way to provide an affordable price point. 

He suggested that the standalone long-term care market is a niche market that doesn't warrant 

tax incentives because it is targeted to more affluent consumers. Mr. Birnbaum said that CEJ 

rather supports promoting more combination products which provide consumers with value in a 

number of ways (including long-term care service benefits) and using federal dollars for other 

purposes such as strengthening social programs, including Medicaid. 

Mr. Leonardi provided his perspective as a former state regulator. He said that insurers 

underestimated the inflation of medical costs, increased life expectancy, and decreased lapse 

ratios; then did not request rate increases until several decades later when they began asking for 

significant increases. He also replied that he believes standalone long-term care products are 

targeted to the middle class, rather than to the affluent (because high net worth individuals don't 

generally have long term care insurance). Furthermore, purchasing long-term care insurance 

does not make sense for individuals without assets to protect. As a result, the middle class are 

those who are risk, rather than the affluent. Mr. Birnbaum replied that the data (reported to the 

interagency task force) suggests that tax benefits for long-term care insurance are largely going 

to more affluent consumers rather than to the middle class. 

Mr. Birnbaum discussed big data analytics as a possible topic for the subcommittee to assess as 

part of its InsurTech workstream. Specifically, Mr. Birnbaum suggested an evaluation of the 

disparate impact as unfair discrimination in insurance. He proceeded to provide background on 

the topic. Mr. Birnbaum said that in most states, intentional discrimination (against prohibited 

16 
classes, race, religion, national origin) is prohibited regardless of any statistical or actuary 

relationship between the class characteristics and the expected claims and expenses. In some 

states, unfair discrimination also includes other prohibited characteristics. For example, some 

states prohibit the use of consumer credit information, one or two prohibit use of gender, and one 

state (Texas) does not permit consideration of an individual's status as an elected official or state 

legislator. He said that the historical perspective was that regulatory oversight over all phases of 

insurance pricing (starting with data collection to underwriting through rates) would prevent 

discrimination on the basis of direct use of prohibited characteristics. However, Mr. Birnbaum 

provided an example of a challenge by fair housing groups in the 1990s against using age and 

home value as underwriting guidelines, which alleged that use of these factors disproportionately 

impacted minority communities (which were characterized in large part by older and lower value 

homes). Accordingly, the use of age and value of the house had the effect of discriminating on 

the basis of race. Mr. Birnbaum said that as a result of these fair housing challenges, insurers 

changed their practices to examine structural home characteristics that were more directly tied to 

claims, such as age of electrical systems and condition of roofs. 

Mr. Birnbaum said that challenges to insurance practices were brought as federal complaints 

under the Fair Housing Act before the Department of Housing and Urban Development (HUD), 

and courts opined that the Fair Housing Act covers fair access to homeowners' insurance in 

additional to mortgage lending discrimination. Mr. Birnbaum added that courts have also 

recognized disparate impact as a form of unfair discrimination under the Fair Housing Act (and 

other statutes such as equal employment opportunity laws. He said that the issue of disparate 

impact in insurance and other financial services has long been contentious and industry has 

brought numerous legal challenges to disparate impact claims (he noted that the Supreme Court 

affirmed disparate impact as a recognizable claim under the Fair Housing Act in 2015). 

Mr. Birnbaum said that HUD developed a methodology and procedure for organizations wishing 

to bring a disparate impact claim and for accused organizations to defend their practices. This 

methodology required parties bringing the claim to make a prima facie case that the housingrelated practice in question had a disparate impact on the protected class. He added that the 

party bringing the complaint also had to provide statistical evidence of the disparate effect of the 

practice. The organization being challenged could defend itself by either proving the allegation 

wrong or arguing that the practice had a vital business purpose for which no alternatives occur or 

exist. 

Mr. Birnbaum said that last month, HUD proposed a rule intended to better implement the 

Supreme Court's decision and current disparate impact procedures, but said fair housing 

advocates believe the rule, if adopted, will effectively eliminate disparate impact claims. He 

noted that Treasury's July 2018 Executive Order Report states that new models and data may 

unintentionally run the risk of producing results that arguably risk violating fair housing laws if 

they result in a disparate impact on protected class. He added that FIO's 2018 Annual Report 

highlighted HUD's expressed intention to continue analyzing disparate impact liability under the 

Fair Housing Act to homeowners' insurance practices that have an unjustified discriminatory 

effect. Treasury also recommended that Treasury recommended that HUD reconsider the 

17 
application to such insurance practices of its 2013 rule and consider whether application of the 

rule is consistent with the McCarran-Ferguson Act of 1945 and relevant state laws. 

Mr. Birnbaum said that at the state level, disparate impact and insurance become issues with the 

growing adoption of big data analytics by insurers, due to the greater potential for proxy 

discrimination against protected classes resulting from the use of new data sources and complex 

algorithms. Mr. Birnbaum said that state insurance regulators have argued that they have 

authority to stop proxy discrimination. He noted that this concept was raised in a recent draft 

paper by the NAIC Casualty Actuarial Task Force, which provided guidance to state regulators 

on the review of complex models for private passenger, auto, and homeowners' pricing. Mr. 

Birnbaum said the draft paper contemplates a regulator rejecting proposed risk classifications if 

the company cannot provide a reasonable explanation of the relationship between the new data 

source and the proposed risk classification. 

Mr. Birnbaum proposed that it is unclear whether regulators actually have the authority to 

enforce disparate impact as unfair discrimination. He said that the Texas Supreme Court ruled in 

the mid-2000s that disparate impact was not a recognized form of unfair discrimination under 

Texas law. 

Mr. Birnbaum said the subcommittee discussed the possibility of examining the application of 

disparate impact as unfair discrimination in insurance, by to reviewing Treasury's 

statements/reports and HUD's proposed regulation. He suggested that this information could be 

useful to both state and federal regulators. 

Mr. Birnbaum said the subcommittee also discussed emerging state digital rights/data privacy 

legislation and emerging efforts to provide guardrails for artificial intelligence. 

Mr. Birnbaum discussed California's consumer data privacy law, and noted that other states have 

considered similar laws. Mr. Birnbaum said that the California law, which applies to all 

industries and is not specific to insurance, intentionally limits some use of personal consumer 

data and requires more affirmative consent for others. The law also contains disclosure in 

accountability provisions. He added that there are some concerns that current or innovative 

industry practices may be compromised because the general law that doesn't account for unique 

industry characteristics. 

Mr. Birnbaum said there are also emerging efforts to provide legislative or regulatory guardrails 

to artificial intelligence. The NAIC recently convened a working group to develop such 

principles and is referencing AI principles developed by the Organisation for Economic 

Cooperation and Development. He added that the U.S. House of Representatives' Financial 

Service Committee has developed a new subcommittee examining AI issues. 

Accordingly, Mr. Birnbaum said that the subcommittee discussed a potential workstream to 

review the work-to-date on consumer digital rights at the state and federal levels, as well as AI 

principles, and develop recommendations that recognize the specific needs of the insurance 

industry and insurance consumers. 

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19 

Director Seitz confirmed that FIO has highlighted the topic of disparate impact in its reports, and 

added that digital rights and data privacy emerged as a clear theme in FIO's outreach on 

InsurTech over the past 6 months. He said that FIO would be working to level-set in its 

upcoming annual report on the topics of data privacy and AI. 

Mr. Keiser said that the issue of data privacy is moving quickly and he hopes the federal 

government will establish basic standards, because a state-by-state approach will be problematic 

for insurance companies (and other industries). He said there is an urgency to the issue, and 

suggested the subcommittee should be spending a lot of time and effort to develop general 

standards that should be employed by all states. 

Committee Presentation of Advice and Recommendations to FIO 

Chairman Glaser re-confirmed that recommendations made by the international subcommittee 

were endorsed by the full F ACI and were formally given to FIO. 

Director Seitz thanked the international subcommittee for its concrete tangible suggestions as 

FIO works to operationalize activities going forward. 

New Business and Closing Remarks 

No new business was presented. 

Chairman Glaser announced that the next F ACI meeting would be held at the U.S. Treasury 

building on December 5, 2019. 

At 3:39 pm, Chairman Glaser concluded the meeting. 

I hereby certify these minutes of the September 23, 2019 Federal Advisory Committee on 

Insurance public meeting are true and correct to the best of my knowledge. 

Dan Glaser 

Chair