Bill Would Aid Fed In Designing Capital Standards Aimed At Insurers

Representatives of the life insurance industry are studying legislation that would make it easier for the Federal Reserve Board to design capital standards for systemically important insurers that differ from the standards that apply to banks.

Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns, R-Neb., introduced on July 26 a bill that would remove insurers from a portion of the Dodd-Frank financial reform act that requires the Fed to apply minimum risk-based capital and leverage standards to insurers designated as systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council.

Under the bill, banking affiliates of insurers would continue to be subject to capital requirements from their prudential regulators, and insurance companies would continue to be subject to state-based capital standards. However, any insurance companies designated as a SIFI would be subject to capital standards set up by the Fed that are tailored to the business of insurance.

"Senn. Brown believes that the Fed already has the flexibility to make these changes, which recognize that insurance companies have different business models from banks, under the current law. He encourages the Fed to do so." Meghan Dubyak, a spokeswoman for Brown, said in an e-mail.

The American Council of Life Insurers released a statement offering support for the bill, saying it was still studying the legislation. ACLI and other industry groups have opposed the Fed's attempts to apply the same capital standards to insurers and banks. "Inappropriate capital standards could affect the price and availability of financial protection for families and retirees. Moreover, applying these standards only to certain insurers may create a competitive imbalance in the marketplace," ACLI said.

The Fed has interpreted a provision in the Dodd-Frank Act as requiring insurers to comply with the Basel III global capital standards. But earlier this month, the Fed granted insurers a temporary exemption from a final Basel III-based capital rule, giving board members more time to "evaluate the appropriate regulatory capital framework for these entities" (Best's News Service, July 2, 2013).

The Brown-Johanns bill comes amid the FSOC's effort to identify which insurers should be designated as non-bank SIFIs. Earlier this month, American International Group Inc. was designated a non-bank SIFI by the FSOC, making it the first insurance company to be regulated by the federal government in more than a century.

FSOC has also designated GE Capital as a non-bank SIFI, however GE Capital does not have an insurance component (Best's News Service, June 4, 2013). FSOC held a hearing earlier this week to consider Prudential Financial Inc.'s challenge to a proposed designation as a non-bank SIFI.

MetLife Inc., the largest life insurance company in the United States, has confirmed that it has reached stage three in FSOC's process to determine whether it would be named a non-bank SIFI (Best's News Service, July 17, 2013).

To be deemed "significant," a company must have $50 billion or more in total consolidated assets or have been designated by the FSOC as systemically important (Best's News Service, April 9, 2013).

FSOC can order companies designated as SIFIs to be placed under the Federal Reserve Board's supervision if 85% or more of the company's revenues or assets come from activities covered by the Bank Holding Company Act. The rule allows FSOC to recommend a company's primary regulator apply heightened regulatory standards to a specific financial activity or practices that it deems to be risky.

(By , Washington Bureau manager: jeff.jeffrey@ambest.com)