FEDERAL ADVISORY COMMITTEE ON INSURANCE 

MEETING MINUTES 

WEDNESDAY, JUNE 12, 2013 

The Committee met in the Cash Room at the U.S. Department of the Treasury, 1500 

Pennsylvania Avenue, N.W., Washington, D.C., at 1:30 p.m., with Brian Duperreault, Chairman, 

presiding. 

MEMBERS PRESENT: 

BRIAN DUPERREAULT, Chairman 

DAVID (BIRNY) BIRNBAUM, Center for Economic Justice 

*MICHAEL F. CONSEDINE, Commonwealth of Pennsylvania Department of Insurance 

JACQUELINE CUNNINGHAM, Commonwealth of Virginia Bureau of Insurance 

JOHN J. DEGNAN, The Chubb Corporation 

ANNE MELISSA DOWLING, State of Connecticut Department of Insurance (for Thomas B. 

Leonardi) 

ROBERT EASTON, State of New York (for Benjamin M. Lawsky) 

*LORETTA FULLER, Insurance Solutions Associates 

*SCOTT HARRINGTON, University of Pennsylvania 

SCOTT KIPPER, State of Nevada Department of Insurance 

*MONICA J. LINDEEN, State of Montana 

CHRISTOPHER C. MANSFIELD, Liberty Mutual Group 

SEAN MCGOVERN, Lloyd's North America 

DANA SHEPPARD, District of Columbia Department of Insurance (for William White) 

MICHAEL E. SPROULE, New York Life Insurance Company 

ALSO PRESENT: 

MICHAEL T. MCRAITH, Director, Federal Insurance Office, U.S. Department of the Treasury 

JAMES P. BROWN, Designated Federal Officer 

DAVID MILLER, Associate Administrator, Federal Insurance and Mitigation Administration 

ROBERT A. KERZNER, LIMRA 

*Participated by teleconference 
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CHAIRMAN DUPERREAULT called the meeting to order. He welcomed everyone 

including committee members and attendees. He noted that a few commissioners were unable to 

attend due to travel restrictions or commitments. He introduced Anne Melissa Dowling from the 

State of Connecticut sitting in for Tom Leonardi. He noted Rob Easton attending from New 

York. He indicated that some members were available by phone but initially technical 

difficulties made it impossible to hear those on the teleconference. The Chairman directed staff 

to correct the problem. He outlined the agenda to include a discussion of global demographics, 

reports from subcommittees, an update on Superstorm Sandy from the Rebuilding Task Force 

and that Commissioner Consedine would do an update on the Reinsurance Captive regulation. 

DIRECTOR McRAITH welcomed everyone and noted that Dana Sheppard was here on 

behalf of Commissioner White. He also acknowledged colleagues who were in attendance, 

former Alabama Commissioner, NAIC President Walter Bell and former Washington, D.C. 

Commissioner Larry Morelle. He announced that the Federal Insurance Office had released its 

first annual report on the insurance industry. A copy has been provided to each of the committee 

members. 

CHAIRMAN DUPERREAULT called for approval of the minutes of the March Meeting. 

They were approved. He then introduced Robert Kerzner, who is the president and CEO of 

LIMRA to speak about demographics. 

Mr. Kerzner indicated that his discussion would be broader than demographics and would 

also look at what are the implications and what is actually happening in the life insurance and 

retirement and savings area. He stated that there is a consistent and ongoing decline in the 

number of U.S. households that own life insurance. In the '60s, 72 percent of households owned 
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individual life insurance. That has dropped precipitously and is now, as of 2010, at 44 percent 

with no bottom in sight. 

He cited several factors affecting those numbers including: 

- Over the next 20 years the growth in Hispanics is expected to be 36 million, while whites 

will only be ten million, African Americans growing eight, and Asians nine. 

- The number of one-parent households has changed dramatically. In 1970 about 13 percent 

of U.S. households were one-parent. That has grown as of 2000 to 31 percent. 

- Fewer Americans are getting married. In fact, there has been about a 41 percent decline 

compared to 1960. 

- U.S. households having children under age 18 have also declined by 21 percent. 

- In 1970, only about four percent of women earned more than their husbands. But by 2009, 

that was up to 29 percent. 

Mr. Kerzner then spoke about concerns regarding retirement in the general population 

and by age group. He cited results from polls and government publications which indicate that 

different cohorts focus on different aspects of the situation. He indicated that younger people are 

very concerned about having enough in savings to retire comfortably but are doing little to 

actually increase their level of saving. 

Retirees and pre-retirees are focusing more and more on longevity increases and what 

that does to assumptions regarding making assets last. Less than half of pre-retirees feel very 

confident about their retirement. Looking at the demographic of the younger people, 56 percent 

of them are not contributing regularly to saving plans like 401 Ks. That is important because the 

odds are that only one in five of Gen X and Gen Y will be covered by a qualified pension plan. 

The amount of disposable income across age cohorts has declined over the past 30 years. There 
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is a presumption that all the X and Ys’ are going to want to buy online or in some different way. 

And in fact, they want a financial advisor to help them make a decision. About 62 percent of 

people today who buy life insurance actually go online and do research beforehand. That 

number was only 30 percent probably four or five years ago. All the data indicates that advisors 

do make a difference. 

The country is becoming increasingly diverse, how people buy, why people buy, what 

they do and don't do is getting extremely more complicated. 

The Chairman thanked Mr. Kerzner for his presentation and asked the committee if there 

were any questions. 

Member Birnbaum asked whether the data showing American households owning life 

insurance has dropped from 72 to 44 percent can be broken out by product type, ethnicity, and 

geographic location. Mr. Kerzner indicated it could be by product and ethnicity but not 

geographic location. Member Birnbaum suggested that such a breakdown would be valuable to 

the Committee as it studies accessibility and affordability. 

Director McRaith stated that it would be tremendously important in hearing not only the 

issues of retirement security for Americans but how the demographic evolution is in some ways 

pushing U.S.-based insurers to look internationally for organic growth. 

Mr. Kerzner described the demographic situation in many countries citing, inter alia, the 

aging populations of the US, Japan and Europe. The action for the insurance companies will be 

the emerging markets for two substantive reasons. One is population. Two is they are starting to 

grow their financial asset base. He also indicated that regulatory measures have a large effect on 

markets. He cited the growth of 401K’s and IRA’s decreased the dependence on life insurance. 

He then contrasted the number of life insurance agents in the US with the number in China. In 
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the United States there are about 169,000 life insurance agents; China Life alone claims to have 

800,000 agents; Others boast 400,000. 

Chairman Duperreault thanked Mr. Kerzner for his presentation. He then checked and 

confirmed that Commissioners Lindeen and Consedine and Members Fuller and Harrington were 

on the call. He then introduced David Miller a member of the staff of the Superstorm Sandy 

Rebuilding Task Force that was put together by President Obama. Mr. Miller is an associate 

administrator at the Federal Insurance and Mitigation Agency (FIMA). 

Mr. Miller began by refreshing some of the claims numbers from the National Flood 

Insurance Program (NFIP). As of today, NFIP has paid about $7.5 billion on all paid claims. 

The breakdown of that in terms of the two main states affected-New Jersey and New York, are as 

follows: In New Jersey, what NFIP has paid on all claims is $3.6 billion; on all closed claims is 

$3.4 billion. There have been 66,903 claims closed with payment and 6,428 without payment. 

That is a closure rate on all claims filed, of about 98.8 percent. The average claim payment in 

New Jersey is $51, 2039. Paid on all claims in New York is $3.5 billion. On closed claims is 

$3.2 billion. That represents 53,425 claims closed with payment, 2,929 without. The average 

claim payment in New York is $60,041 and their closure rate is about 99 percent. 

One factor that NFIP is dealing with is the increased cost of compliance issue. This is due 

to the need for homeowners on the rebuild to elevate their structures. NFIP pays up to $30,000 

to elevate. 

The current balance in the National Flood Insurance Fund is about $128.4 million. There 

will be some payments come out of that for current disaster activities. Some payments come out 

of that for increased cost of compliance but the fund is still generating enough money where 

there will be no more borrowing, save having another somewhat catastrophic disaster. 
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Mr. Miller then discussed some of the problems that arose in the aftermath of Sandy. 

Depending on whether a person has insurance has an effect on how their claim is handled. 

Without insurance, a claimant could have promptly received a low interest loan or a grant. With 

insurance, it could take more time to receive a payment due to the usual procedures of verifying 

an insurance claim. To deal with this, the NFIP created the 5-25-5 program. This provided an 

advance payment of $5,000.00 to be credited against personal property with payments for 

structural damage after adjustment. There can also be delays in getting payments into the hands 

of claimants where lenders are involved and insist that payments are made to them rather than 

the homeowner. Sometimes lenders will hold those payments until proof of repairs has been 

submitted. Since insurance proceeds cannot be used for temporary repairs, the final $5,000.00 of 

the 5-25-5 program is earmarked for things like windows and doors to render a house livable but 

constitute permanent repairs. 

He also cited the problem caused by the policies being actual cash value rather than 

replacement cost. Insureds’ are confronted with the gap that can exist between the two. This 

was a source of many complaints to state regulators. The NFIP communicated frequently with 

insurance departments to explain the discrepancy. There were also problems with the 800 

number which sometimes was a referral loop which passed the caller on to a different department 

but didn’t resolve the problem. There were also complaints that the number of adjusters was 

inadequate. Even with the problems, the NFIP between 98 and 99% of claimants have received 

some payments. 

Mr. Miller then turned to the problems created by uncertainty in rebuilding due to 

remapping of flood zones. Flood maps identify risk by geographic zones. The risk map drives 

insurance rates. The zone a person is in and the elevation of their property are key elements in 
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pricing insurance. In many areas of New York and New Jersey, that information is very dated, 

sometimes going back to 1983. Based on experience that data is wrong and if someone rebuilds 

relative to that data, it is likely to be wrong. And giving what is coming in the Flood Insurance 

Reform Act, if it is wrong, the penalties could be severe. Not knowing for sure what elevation is 

necessary to comply with regulations means that the policy payout of $30,000.00 for regulatory 

compliance may be inadequate. The consequence is that many people are reluctant to rebuild 

until they know for sure what is going to be required. He then spoke about mitigation programs 

and the procedures for communities to participate. 

Mr. Miller then commented on the impact of the Biggert-Waters legislation on premiums. 

One of the things it calls for is the removal of the flood insurance subsidies from non-primary 

residences. This may affect resort communities where some owners might not come back. 

Others that will be affected immediately under Biggert-Waters are severe repetitive loss and 

repetitive loss structures, those that have had repeated losses over a certain dollar thresholds. 

The other impact of Biggert-Waters is caused by mapping changes. Folks who were not in flood 

zones may now be included. For those newly included the law calls for premiums to start at 20 

percent of full rate increasing another 20percent until the full actuarial rate is reached in five 

years. So mapping changes occurring right now will ultimately have an effect on the build and 

the rebuild, and the premiums that people pay. 

Chairman Duperreault asked if there were any questions. 

Member Birnbaum asked if the Program has run through the book of exposures to 

identify the rate increases by specific exposure and the amount and location. Mr. Miller 

confirmed that this had been done. Member Birnbaum then asked if it was known how many of 

those properties are facing rate increases of zero to five percent and five to ten percent, et cetera. 
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When Mr. Miller said yes, Member Birnbaum indicated that there are a lot of communities that 

are really up in arms about the NFIP rate hikes. He offered that would be nice to have some 

information for policymakers on what the actual rate impacts of that are. Mr. Miller said yes but 

the other part of the answer is because of the way policies are rated, it becomes very 

individualized. 

Director McRaith thanked Mr. Miller for his presentation and asked him to speak briefly 

on the Sandy Recovery Task Force, what it is, and what its objectives are. Mr. Miller indicated 

that his involvement with the Task Force was limited to insurance matters and the group’s 

mandate was broader. One of the things that they are looking for is what are the mitigative 

measures and how can they be applied. In low probability but high consequence events, 

relocation can be a response. But the FIMA approach of acquiring property and converting it to 

green zones won’t be acceptable in all areas. For example, a category 2 or 3 hurricane, with the 

same kind of sequencing as in Sandy, would flood Wall Street. He queried “ is Wall Street going 

to move? No. Can it be hardened? What is the cost-benefit? How do you begin to buy-down 

the risk in those areas? “ 

Director McRaith thanked Mr. Miller for his time and input. 

Chairman Duperreault then asked John Degnan for the report from his subcommittee. 

Member Degnan then presented the report of the International Regulatory Balance 

Subcommittee. There was a fairly robust discussion on the five or six questions that the Director 

propounded. 

Mr. Degnan stated that it seems relatively clear that most companies pay careful heed to 

the implications of the rating agencies' models of business decisions, debt financing decisions, 

stock buyback decisions, generally the management of capital in deciding whether or not to 
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implement them. Someone made the point that companies don't manage to the model but in their 

management, they take careful heed of the implications of the model, particularly companies that 

tend to market their products based on the rating afforded the company. There was a consensus 

that rating agencies have stepped up their game since 2008 and the models have become much 

more sophisticated and more transparent. 

There was some concern, though, articulated by some members of the subcommittee that 

the models are not uniformly applied. Some felt that the rating agency models were more 

stringent for capital management purposes than the RBC model. That was not widely shared by 

the regulators on the call who had a view that the rating agency models were not sufficiently 

predictive of solvency and that the RBC model did a better job of that. 

Mr. Degnan then invited other members of the subcommittee to make any comments they 

had. 

Chairman Duperreault recognized Member McGovern for comments. He indicated that 

in lines of business that are rating-sensitive, there is a de facto role rating agencies have assumed 

in allowing market access into those lines of business. He stated that if you want to get into 

property catastrophe lines of business, you are required to have a certain level of rating to be able 

to market your product. 

Chairman Duperreault then recognized Member Birnbaum for comments. 

Mr. Birnbaum suggested that there ought to be concern if the rating agencies models were more 

predictive of insolvency than the RBC model. He also voiced concern that operational decisions 

such as which lines of business to write and rates to charge appear to be similarly influenced by 

the credit rating agencies. He also questioned whether the conclusion of the subcommittee that 
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rating agencies did not exert significant influence on competition squared with other findings of 

the group. 

Mr. Degnan responded that all companies make decisions about product lines and rates, 

based on their own management of their need to get a sufficient return on equity and manage 

their capital in a way that meets their shareholders' needs or their policyholders' needs at their 

mutual companies. That is not driven by a rating agency model application as much as it is the 

competitive nature of the business. He then expressed an interest in a broader viewpoint from 

the International Association of Insurance Supervisors and a broader regulatory perspective on 

the degree to which rating agency models should play a part, for example, in supervisory college 

assessments of a company. 

Mr. Degnan acknowledged Mr. Birnbaum’s concern regarding the relative predictive 

abilities of the RBC and credit models and suggested that a deeper analysis would be of value. 

Member Harrington offered his opinion that while the RBC model focuses on solvency, 

the rating agencies often have higher standards for A plus A plus-plus rating so no one would 

want the regulators to move toward satisfying the very same requirements. 

Mr. Degnan responded that he was not sure that relying on the rating agency models for 

guidance in the regulatory apparatus necessarily requires some increased capitalization on the 

part of companies and if so that would reduce competition. 

Mr. Harrington stated that it would be counterproductive to making insurance affordable 

and available if the RBC pumped up the regulatory requirements to get through the hurdles that 

would be necessary to get an A plus or an A plus-plus rating. Mr. Degnan agreed with the 

comment. 

Chairman Duperreault asked for other comments or questions. 
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Member McGovern suggested that the intersection between regulation and the rating 

agencies seems like an area that might be worth some further work. He indicated that another 

thing of interest is to obtain a better understanding of how rating agency ratings of companies are 

factored into the regulatory system both in the US and overseas. 

Mr. Degnan stated that there had been at least one regulator on the subcommittee who felt 

that the rating agency models were entitled to no weight in the financial review conducted by the 

Departments of companies within their jurisdiction. If that is a prevalent viewpoint on the part 

of the regulators, it might not be of value to advance the idea to international colleagues that such 

usage is something that is worthy of consideration, given our system in the United States. 

The Chairman thanked Mr. Degnan for his report. He then called on Member Birnbaum 

to give the report of the Affordability and Accessibility Subcommittee. 

Mr. Birnbaum indicated that his report would track the memo submitted in response to 

the Director’s questions. The first two questions were: Should we define underserved 

communities and if so, how? The definitions the group agreed upon were: availability means 

that essential insurance products are offered by insurers in a particular market and affordability 

means that the cost of using insurance products is a reasonable percentage of the consumer's 

income. 

In trying to develop a methodology, the first step in the analysis, he suggested, is 

identifying the insurance product that provides the financial security consumers need. Once that 

product has been identified, the features of the product necessary to meet the consumers' needs 

and expectations must be identified. The next step would be to research whether that product is 

actually available in various markets. If the product is not available in certain markets, the next 

step would be to research why. If the research shows that insurers are making a product 
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available or would make a product available if consumers could afford the insurance product but 

that consumers aren't purchasing a product, the next step is to examine the affordability issues. 

Mr. Birnbaum continued with the observation that the Dodd-Frank Act identifies three 

specific characteristics of consumers and markets for FIO to monitor availability and 

affordability: traditionally underserved communities, minorities, and low and moderate income 

consumers. The Act identifies two specific and objective characteristics of insurance consumers, 

race and income. The third characteristic “traditionally underserved” is undefined. 

He stated that using this methodology, FIO can identify different product markets and consumer 

segments, in addition to minority and low income and low and moderate income communities, 

which are underserved for a particular product. 

As to what insurance product should be monitored, Mr. Birnbaum listed the following 

general categories of insurance that it seems that FIO has the authority to monitor: personal auto 

insurance, residential and commercial property insurance, life insurance, retirement income, 

products, hybrid long-term care as opposed to regular long-term care, and credit-related 

insurance products. 

Mr. Birnbaum indicated that the best way to move forward is through a data-driven 

analysis of the availability and affordability of insurance in specific markets, the idea being that 

it should be easier to get past earlier debates if there is evidence that everyone is looking at, as 

opposed to folks staking out historical positions on the issue. He added that FIO is wellpositioned to identify global events and trade agreements affecting domestic availability and 

affordability of insurance products and the ongoing ability of state insurance regulators to impact 

insurance markets in their states. 
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The subcommittee suggested that FIO start by working with and building upon existing 

initiatives and activities. The first step would be identifying existing data collection activities by 

statistical agents, insurance departments, federal agencies, commercial organizations, which 

could be shared with FIO and which provide sufficient data to analyze at least some aspects of 

availability and affordability. And it would also be useful for FIO to identify gaps in the data 

necessary for monitoring availability and affordability of specific products and markets. 

Mr. Birnbaum then thanked Commissioners White and Cunningham and Chris Mansfield 

for their extensive comments and participation in our discussions and noted that the paper was 

really a group product. 

Chairman Duperreault then recognized Chris Mansfield for comments. 

Member Mansfield thanked Mr. Birnbaum for his leadership on this committee. He 

added that there was a fair bit of discussion about the natural tension between FIO versus the 

state regulators and there was no desire to disenfranchise either side of that equation. 

Member Cunningham also thanked Mr. Birnbaum. She then suggested that the question 

of prioritization be opened up for discussion by the group. 

Mr. Birnbaum offered his opinion that lifetime retirement income products were 

something that FIO could focus on. He also suggested that the second priority should be 

property insurance issues. Both of these areas have substantial federal interaction and would 

seem logical to have FIO involvement. 

Director McRaith thanked the members of the committee for their work and thoughtful 

suggestions. He also stated that there were a couple of process items that need to be discussed 

informally over the next weeks including deputy participation in committee and subcommittee 

meetings. 
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Chairman Duperreault added his thanks to Mr. Birnbaum. He then indicated that the next 

topic involved reinsurance captives. He stated that Commissioner White, who would normally 

make a presentation on the matter, was traveling and not in attendance and then called on 

Member Consedine to give the report by phone. 

Commissioner Consedine reported that The National Association of Insurance 

Commissioners’ Captives and Special Purpose Vehicle Subgroup of the Financial Condition (E) 

Committee prepared a draft white paper addressing the use of captives and similar alternative 

risk bearing entities by commercial life insurers in the United States. The white paper was 

exposed on March 15, 2013, and comments were due on April 29, 2013. On June 6, 2013, the 

Subgroup adopted the white paper, and referred it to the E Committee for consideration. The 

primary focus of the Subgroup was on U.S. commercial insurers’ use of affiliated captives or 

special purpose vehicles or SPVs. The Subgroup determined that the majority use of 

captives/SPVs by commercial insurers was related to the financing of XXX and AXXX reserve 

redundancies. The Subgroup offered recommendations to address the issues presented in the 

white paper including accounting considerations, access to alternative markets, IAIS standards, 

and credit for reinsurance model enhancements/added reinsurance disclosure/transparency. 

Chairman Duperreault thanked Commissioner Consedine for his report and commented 

that the NAIC is taking pains to explore the matter. He then asked whether there were any 

questions for the Commissioner. 

Director McRaith thanked the Commissioner for stepping in especially since he has got 

some things going on in Pennsylvania that prevented him from traveling today. 

Chairman Duperreault then recognized Mr. McRaith for a report on international matters. 
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Director McRaith announced that he would be testifying on international developments 

the next day before the House Subcommittee on Housing and Insurance. In other matters he 

reported that at the IAIS the FSB informed the G20 leadership that the designation of global 

systemically important insurers should be completed in June of this year and at this point, that 

remains on schedule. 

As to ComFrame he indicated that the next version of the written document will be 

released sometime around the IAIS annual meeting in October in Chinese Taipei. 

Regarding the EU/US Insurance Project, it continues and Mr. McRaith said that a lot of 

good work is being done. In December there will be a public meeting with interested parties, 

regulators from the EU and the US and industry to talk about experiences with supervisory 

colleges, including what has happened to date, what are the learning experiences that both the 

industry and supervisors can share as best practices, and the development of best practices for 

supervisory colleges. 

Mr. McRaith mentioned that the US China Forum would be held in Washington, D.C. in 

July. He thanked all the committee members and their representatives for their work and input. 

Chairman Duperreault opened the floor to questions from the Committee for the Director. 

Seeing no questions, he announced that the next meeting would be September 18th at a time not 

yet determined. The Chairman then brought up potential topics for the September meeting and 

asked the Director whether the Terrorism Risk Insurance Program (TRIP) should be one of the 

topics. 

Director McRaith agreed that TRIP should be on the agenda because of its importance to 

the insurance industry and to all other aspects of the American economy. The program is set to 

expire at the end of 2014. FIO is part of the group that will be preparing a report on the program. 
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That report will be released in the fourth quarter of this year. In advance of that, there will be a 

federal register notice seeking comment from the public. And that should coincide well with the 

meeting schedule of September 18th. 

Chairman Duperreault invited Committee Members to offer any suggestions they might 

have for additional topics and then asked the Director for any final comments. 

Director McRaith thanked all of the participants in the room and on the phone. In 

particular, he extended best wishes to Members Fuller and Harrington for full, prompt 

recoveries. 

Chairman Duperreault announced the meeting adjourned at 3:48 PM.