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 Remarks of Federal Insurance Office (FIO) Director Michael McRaith at Standard And Poor’s 30th Annual Insurance Conference

As prepared for delivery


NEW YORK - Good morning, and thank you for the invitation to meet and speak with you today.  I’m delighted to join the other distinguished speakers and to offer remarks on important developments in the U.S. insurance sector. 


Insurance as a global enterprise has been the subject of great interest for many years, but the topics you will address in this conference are more acutely relevant now than ever before. 

The insurance sector, both internationally and in the United States, is evolving dramatically, and it is important that we take these opportunities to reflect upon where we are now and where we are going. 


The panel discussion topics of this conference regarding the convergence of international and domestic insurance issues echo other conversations and debates on these same issues that have occurred for more than a century.


People are often surprised to learn that over 100 years ago, in his annual message to Congress (the equivalent of a “State of the Union” speech), President Theodore Roosevelt noted that: 

“The business of insurance vitally affects the great mass of the people of the United States and is national and not local in its application. It involves a multitude of transactions among the people of the different states and between American companies and foreign governments.”


As the NAIC often notes, it was among the founders of the International Association of Insurance Supervisors, or the IAIS, back in 1994, and the states have worked to set and meet international standards ever since.


In December of last year we released the Federal Insurance Office Report on How to Modernize and Improve the System of Insurance Regulation in the United States. In our Report, we recognized and discussed the important integration, where appropriate, of local, state-based regulation with international standards. 


We also reiterated our support for state regulation and called for further use of the current system in which the federal government has an important complementary role and the states remain the primary regulators of the business of insurance.


Today I’m going to share our thoughts on the intersection of domestic regulatory modernization and international insurance developments. 


It’s notable that we are having this discussion in New York City, the nation’s financial capitol, and home to many of the world’s largest insurance companies and insurance brokerage firms. 

It’s also great to be in this State where Superintendent Lawsky carries on the great New York tradition of strong, effective insurance leaders, following the likes of Eric Dinallo, Howard Mills, Jim Corcoran and others. 


An essential predicate to any discussion of the U.S. insurance sector is the recognition that the United States has the most diverse and competitive insurance market in the world.  We have thousands of companies and tremendous diversity in our insurance markets, ranging from small rural mutual companies operating in a few counties to massive global firms engaged in a variety of financial services. 


While serving as Illinois Director of Insurance, I learned firsthand about the importance of smaller companies to the marketplace and to local and regional economies. We recognize that there have been significant consolidation pressures  in that industry segment for many years, but the legacy and importance of small and mid-size insurers is undeniable and absolutely worth preserving.


It is also undeniable that the largest of the U.S. insurance firms have an important role in the financial sector, including the internationally active insurance groups which have generated global interest in recent years. 


Indeed, in the United States, insurance is both local and global.  Thousands of companies compete in markets throughout the country, underwrite risk on a local and personal basis, and consumers have the benefit of local support from state insurance departments. 


At the same time, some American firms are extending operations in emerging markets around the world, and several, in the foreseeable future, hope to generate 40% or more of operating revenue from outside the U.S.  We also know that many well-known insurance companies in the United States now have non-U.S. parents or non-U.S. holding companies.

Behind much of the local and global industry is reinsurance—a global product and market with many important participants based outside the United States. 


To understand the U.S. market, it is also necessary to understand the important role of the federal government in insurance sector oversight. 


The Dodd-Frank Act vests the Federal Reserve with authority to supervise all savings and loan holding companies, some of which own insurance company subsidiaries.  In addition, the Financial Stability Oversight Council, or FSOC, which is comprised of the federal and state financial regulators, as well as an independent member with insurance expertise, may designate a nonbank financial company, including an insurer, to be subject to supervision by the Federal Reserve and enhanced prudential standards. 


Our Office, Treasury’s Federal Insurance Office, has broad authority, through the Dodd-Frank Act, including (1) key-turning authority with respect to the FDIC’s orderly liquidation of an insurer; (2) the authority to monitor all aspects of the insurance industry and its regulation; and (3) the authority to coordinate and develop Federal policy on prudential aspects of international insurance matters and represent the U.S. at the IAIS.


The federal government is also involved with insurance supervision in a myriad of other ways, such as through the SEC’s review of certain annuity products, HUD’s interest in homeowner insurance, and the FHFA’s interest in mortgage and forced place insurance.


Congress also remains engaged in the insurance sector, as illustrated by the Nonadmitted and Reinsurance Reform Act, which streamlined the tax collection for multi-state surplus lines placements and limited the extraterritorial application of a state’s reinsurance laws.


Even the most ardent supporters of the state regulatory system support the adoption of the National Association of Registered Agents and Brokers, or NARAB II, a federal fix of the inefficiency and cost encountered by agents and brokers seeking to be licensed in more than one state.


Of course, the federal government also provides significant programmatic support for key insurance markets, such as with the Terrorism Risk Insurance Program, or the Department of Energy’s Nuclear Risk Insurance Program, political risk insurance from OPIC, the FAA’s Aviation Insurance Program, FEMA’s Flood Insurance Program or USDA’s Crop Insurance Program. 


In combination, these federal roles do not replace the states as primary insurance regulators, but rather emphasize the complementary roles that state regulators and federal authorities have in the areas of insurance and reinsurance. 


In speaking of the U.S. insurance market, we also recognize the benefit of free markets and competition.  To reiterate the point I made a moment ago, the diversity of the U.S. insurance marketplace is a strength that should be enhanced.  Local and global competition allows consumers to benefit from innovation, to obtain better service, and to purchase policies at lower prices.  Competition in the United States means more affordable products tailored to meet the needs of individuals and businesses.  At the same time, globally, American firms should compete on a level playing field.  For this reason, we should be supportive of efforts to develop international supervisory standards that promote consistent safeguards and fair opportunity to enter and compete in new markets. 


In our view, as the insurance world changes, we should challenge ourselves to embrace that change, contribute constructively in support of that change, and work to identify best practice standards that serve the best interests of U.S. consumers and U.S. companies.  These opportunities will be more fruitful, and the standards are more favorable, because Treasury is at the table asserting U.S. leadership.


That is a characterization of leadership that resonates for us.  Working together, the U.S. participants in the international standard-setting activities should continue to shape and guide international consensus. 


Now, while we support competition at home and abroad, we must not lose sight of appropriate consumer protection practices, and safety and soundness standards, that are premised upon the insurance business model. 


Our recent experience invokes the example of AIG during the financial crisis.  While it is not representative of the insurance industry, of course, AIG was among the insurers that felt the stress of the crisis.  It received $23 billion dollars to support its securities lending program, but it was certainly not the only insurer to benefit from capital or regulatory relief. 


Putting this all together requires us to consider, then, both how we execute our oversight in the United States and what should be the substance of the regulation.


For many years, the debate in the United States about insurance regulatory modernization was framed as the binary question of either federal or state, as if it’s a zero sum equation.  For some, that is a convenient and easy analysis.


In fact, as I previously described, that frame is a relic.  For purposes of our Modernization Report, we assessed the U.S. insurance regulatory system as it is, not as it was nor as some might wish it to be. 


The question for the U.S. insurance regulatory system is where should the federal government engage—on what issues—and how can that federal role best complement the role of the states as regulators of licensed insurance entities. 


For example, on FSOC, there is a strong voice from three insurance experts who help the Council consider the financial stability implications of developments in the insurance markets.  The Council has developed an active dialogue with state regulators that takes advantage of the complementary roles and collaborative efforts between the primary regulators of the business of insurance, on the one hand, and federal financial authorities, on the other. 


Federal and state authorities recognize and respect the limits of their respective jurisdiction.  It serves the interest of all authorities as we work together collaboratively both at home and abroad. 

Our Modernization Report emphasizes the reality of this collaboration today, including the existing mandates for the federal government to take certain roles relating to insurance.  In the Report itself, we discuss the history of insurance regulation in the United States, a cycle that is entirely fascinating for those of us interested in the U.S. Constitution and the evolution of the industry.  For example, it was in 1866, immediately following the Civil War, that New York-based life insurers went to Virginia to sell life insurance and refused to comply with a Virginia law that required an agent to post a bond. That led to the Paul v. Virginia decision in the U.S. Supreme Court that determined insurance was not a matter of interstate commerce and, therefore, was subject only to state regulation. 


Following the Report’s background discussion, we split our topical analyses into two broad sections, one entitled “Prudential Oversight” and another entitled “Marketplace Oversight.”

The Prudential Oversight section addresses a broad range of issues involved with the solvency, capital and risk management of an insurance firm, and the Marketplace section discusses the more consumer-facing and product-related topics, such as product approval, market conduct and suitability for annuity products. 


In total, the Report provides 27 recommendations that fall into two categories:  (1) areas for which a lack of uniformity in the state system create significant inefficiency or are otherwise detrimental to consumers and the country, and (2) those areas of an overriding national interest.

Some of these recommendations are on a shorter fuse and some on a longer fuse.  Among our priority areas of interest in prudential oversight are the international standard-setting activities, reinsurance collateral reform, increased uniformity of solvency oversight, and the proliferation of reinsurance captives by U.S.-based life insurers.  I’ll talk in detail about our international work in a few minutes, so I’ll first briefly discuss the other three.


With respect to the states’ laws governing credit for reinsurance, the reinsurance business model is most often global, and the regulation of that business should reflect and integrate that business model.  In our view, collateral requirements for reinsurance should be risk-based, not geography-based.  The states are moving forward with reform, and we’ve called for Treasury and the United States Trade Representative, or USTR, to enter into an agreement – a so-called covered agreement – with other countries that would implement an approach based on the NAIC model and do so in a nationally uniform manner. A covered agreement is a unique authority given to the Federal Insurance Office and the USTR, and we are approaching this project collaboratively and with respect for the seriousness of the endeavor.


With respect to solvency oversight, we note that solvency standards are similar, state to state, but may be implemented or interpreted differently depending upon the state.  In our Report, we call for the states to develop a process whereby regulatory peers from different states review important decisions affecting solvency matters before those decisions are made.  Recent experience with states’ alternative views on Actuarial Guideline 38, or the implementation of principles-based reserving, demonstrates the increasing importance of this concern. 

As has been reported in the popular media and elsewhere, the proliferation of the use of reinsurance captives by U.S.-based life insurers raises concerns about the efficacy of multi-state oversight.  Some firms are exploiting inconsistencies among state-based oversight of captives in order to receive advantageous treatment of existing reserve requirements.


We’ve highlighted this important regulatory issue, as has Superintendent Lawsky and the State of New York, among others. 


In our view, issues of both transparency and capital for reinsurance captives should be resolved.  For transparency, the lead supervisor for the ceding company should have ready access to, full visibility into, the details of the transaction.  With respect to capital, appropriate standards should require that the transfer of liabilities by the insurer to the captive be reflected in capital that is both real and available if needed.


The state regulators appear to have resolved their interstate differences on the substance of captive oversight, and the challenge now is implementation. 


I should add that we did call for federal oversight in the area of mortgage insurance.  The financial crisis demonstrated the importance of the housing finance system to our national economy, and private mortgage insurance should be an integral component of the housing finance system.  Through the crisis, nearly half of the private mortgage insurance industry failed, a result that shifted greater loss to other financial institutions and the federal government. 


For this reason, we call for the federal government to supervise the private mortgage insurance industry, thereby providing one supervisor, not multiple competing supervisors, to develop, implement and enforce solvency standards in a nationally consistent manner that supports the housing market, and that is designed to provide greater protections for consumers and taxpayers.

In the areas of marketplace oversight, among several other recommendations, the Report calls for the states to improve market conduct examination practices that, currently, can be inefficient, redundant and reduce the quality of the outcomes for both insurers and consumers.   Not only should states better coordinate market conduct examinations, but also states should establish objective criteria for the contractors who, on behalf of state regulators, will examine an insurer’s consumer-focused behavior.  Market conduct examiners should be objectively qualified, on budget, and closely managed.


For members of the military, the portability of insurance products across state lines has long been a challenge.  Many active duty military members move from one state to another in the course of complying with orders.  In the Report we called for reform on this subject – members of the military serving our country should be able to treat personal auto insurance just as they treat their other financial services.  Recently, lead sponsors Congressman Ed Royce and Congresswoman Tammy Duckworth introduced the Servicemember Insurance Relief Act, a bill designed to address this very issue.  We look forward to working with both leading members as this important piece of bi-partisan legislation moves through Congress.


Finally, in our Report we called upon the states to enhance efforts to adopt the NAIC’s model establishing suitability standards for the sale of annuities.  This NAIC model was adopted in 2010 but has been implemented in only 29 states.  With an unprecedented percentage of the U.S. population entering retirement age, consumers in every state are entitled to appropriate consumer protection standards.  These state-by-state disparities, as evidenced by the uneven implementation of the suitability model, increase compliance costs for industry and reduce protections for consumers.


To recap, our Modernization Report calls for a continuation of the existing hybrid system in which the states remain the primary regulators of licensed insurance entities and the federal government has an important complementary role.  This framework takes our system as it is, including its strengths, but calls for federal attention to the matters of uniformity or national importance.  We look forward to reporting publicly on progress made to implement the various recommendations. 


Now allow me to make a few comments about international standard-setting activities at the IAIS and in the EU-U.S. Insurance Project. 


International standard-setting work is focused on the identification of best practices for supervision, and every participating country is called on to contribute constructively to that effort.  Participating supervisors flesh out the positive aspects of different ideas and approaches and, then, collaboratively, work toward consensus in hammering out the technical details. 

With respect to international standards, this work is occurring, at its core, because the international insurance marketplace has changed dramatically in the last decade.  This is not news to those of you who work for insurers with international operations or aspirations.    

The impetus for the global standard-setting activity is four-fold:


 To promote financial stability through consistent, high quality prudential standards;


 To promote a level playing field through greater understanding among supervisors in those jurisdictions where the international firms are pursuing growth;


 To provide guidance to supervisors, particularly in emerging markets, who want to implement insurance supervisory regimes reflective of international best practices; and,


 To reduce the compliance burdens for those firms operating in disparate markets around the world.


The Financial Stability Board recognized the important financial stability role of consistent standards in July 2013, when it called on the IAIS to develop a comprehensive supervisory framework and quantitative capital standards applicable to the largest and most internationally active insurance groups. 


For purposes of the IAIS, these are groups operating in more than 3 countries with 10% of gross premiums from outside the home country and at least $50 billion in total assets or $10 billion in annual gross written premium.  In the United States, this would be roughly 12-15 of the 1875 non-health insurance groups.


Large, internationally active insurers domiciled in North America, Asia, and Europe are pursuing unprecedented growth in new markets.  Private market premium volume increases in countries around the globe illustrate that insurers are committed to international growth and this trend is not slowing down.


One clear indication that growth in these countries will continue is that many are at a relatively low level of premium volume to GDP. 


For example, from 2008-2012, in China, premium volume increased by $105 billion but shrunk as a percentage of GDP from 3.11% to 2.94%.


Brazil increased in premium volume by $35 billion and increased as a percentage of GDP from 2.87% to 3.65%.


South Korea increased in premium volume by $42 billion, Taiwan by $23 billion.


Notably, in the U.S., we still saw relatively strong premium volume growth of approximately $30 billion, but a decline in total volume as a percentage of GDP, from 8.73% to 8.1%. 


In that same period, we saw developed economies decline as a percentage of global premium volume.  For example, the U.S. declined by over 5 %, the UK by 35%, and Spain by more than 23%.  At the same time, China grew as a percentage of global premium volume by more than 61%, South Korea grew by 32%, and Brazil by more than 60%.


These numbers indicate what the global demographics have already told us in so many other ways:  emerging markets present enormous opportunities for growth by U.S.-based firms and that growth will continue, we hope, at an increasing rate in the years to come.


As a result, many emerging markets also are looking to modernize their insurance supervisory regimes, just as other, more developed markets have done in recent years.  For example, in North America, both Mexico and Canada have undertaken sweeping reforms of their insurance regulatory systems just as have Europe, Australia, China and South Africa in other parts of the world.


With the concurrent forces of increased market globalization and regulatory modernization, another objective of the international standard-setting activities is to reduce the breadth of the differences among the participating supervisors. 


If we can reduce the number regulatory approaches, reporting requirements and capital assessment practices for international firms, then we can reduce significantly the compliance burden of multinational operations.  None of this will happen immediately, of course, but the global insurance groups should reasonably expect a long-term reduction in compliance burden as a result of this international work.


To be clear, international standards are not self-executing—that is, an international organization cannot unilaterally impose a standard or requirement on an insurer in the United States. 


The implementation of international standards will be a function, in the U.S., of either the states, as it has always been, and, for the few insurers subject to its jurisdiction, the Federal Reserve. 

It’s important to emphasize that international insurance standards are not new but have been around for nearly twenty years.


In our view, consistent with past practice, implementation in the U.S. should occur in a manner tailored to the unique features of our insurance markets, promoting competition and consumer choice, and safeguarding policyholder protection and financial stability.


With respect to capital, the current IAIS schedule calls for an insurance capital standard to be developed by the end of 2016, for direct testing with insurance firms through 2018, and partial implementation around the world beginning in 2019.  Testing, which already includes several leading U.S. firms, will evaluate both the practicality and value of the standards, lead to refinement and re-calibration of the standards, and allow for the United States to determine the appropriate method and degree of implementation.  Given the diversity and complexity of the U.S. market, our expectation, in addition to testing directly with the firms, is also to conduct a broader market impact analysis.


Now, before I conclude, let me take a few moments to discuss our work with the European insurance authorities.


The U.S. and the EU are both very significant insurance markets.  In terms of premium volume, these two consolidated markets are the largest in the world.  As a consolidated market, in fact, the EU is the largest in the world.   


The U.S and EU also are home to many of the world’s most prominent global insurers—large, multinational insurance groups that are pushing ever more aggressively into new markets around the world.


With this in mind, FIO convened the insurance leadership of both jurisdictions at Treasury in January 2012 and set out to define a way to improve compatibility between the jurisdictions.  We call this the EU – U.S. Insurance Project.  Commissioners McCarty, Voss, and Consedine, in addition to NAIC CEOs Terri Vaughan and Ben Nelson, have all been excellent partners in this important work.  


The process recognizes that U.S. standards will need to be tailored to our market and to the U.S. approach.  For example, issues of group supervision, confidentiality or professional secrecy and reinsurance are being addressed, as are important topics like reporting, on site examinations and actuarial standards. 


Indeed, it is in this context that a covered agreement to address reinsurance collateral requirement is most often discussed.


Together, all parties to the Project aim to remove regulatory uncertainty for insurers operating on both sides of the Atlantic so that those firms are subject to appropriate prudential standards and can plan for the future.  Firms want to compete on a level playing field, at home and abroad, and the uncertainty presents serious challenges to the development of plans for future growth or investment.


The Project has given all parties an appropriate platform to share views and approaches, and we are also finalizing a process that will lead to a result enabling U.S. and EU companies to operate in each other’s markets without unnecessary regulatory impediments.


The process has been extremely constructive, collaborative and highly informative, and we welcome continuing cooperation with all participants as we move to an approach that will produce much-needed clarity and certainty for the industry while preserving essential consumer protections and market competition.


Before closing, I should add that we, Treasury, applaud the strong bipartisan action by the Senate Banking Committee to preserve the long-term availability and affordability of property and casualty insurance for terrorism risk.  A report of the President’s Working Group on Financial Markets recently affirmed the importance of TRIA to the national economy.  We look forward to swift action by the full Senate and the House to extend the program.


The U.S. insurance market and its oversight are unique. Through effective collaboration at home and abroad, U.S. insurance authorities are well-positioned to provide much needed U.S. leadership that complements our shared interest in a vibrant, well-regulated insurance market that promotes competition and financial stability and protects consumers.


Finally, it bears repeating that in all of our work, both internationally and domestically, the Treasury priorities will remain the best interests of U.S. insurers, consumers, the U.S. economy, and jobs for the American people.



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