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The U.S. life insurance industry is now entangled in the “too big to fail” debate as a result of an amendment to the financial-services regulatory reform law that imposes higher capital requirements on financial institutions.
The Collins amendment, authored by Sen. Susan Collins, R-Maine, directs federal regulators to impose minimum leverage and risk-based capital requirements on banks, bank holding companies and non-bank financial firms identified by the new Financial Stability Oversight Council, according to a statement from the U.S. Senate Committee on Homeland Security and Government Affairs.
Bank capital and reserving requirements could be inappropriately applied to life insurers, said Julie Spiezio, senior vice president and deputy general counsel for the American Council of Life Insurers. As written, the amendment applies to all bank and thrift holding companies, or companies that own a bank or thrift, which could affect life insurers that are, or are held by, a bank/thrift holding company, she said.
The capital and risk standards for the largest financial institutions were more lenient than those that applied to smaller depository banks, Collins said. However, increasing capital requirements as firms grow provides a disincentive to their becoming too big to fail, Collins said.
Life insurers are caught by the language of the amendment, Ernst Csiszar, director of the insurance practice at Bridge Strategy Group, said.
Ultimately, the question will be, “Does the organization, regardless of operating or holding company composition, pose a systemic risk? And we are not quite sure as to what really constitutes systemic,” said Csiszar, a former insurance director of South Carolina.
The amendment directs regulators to use a ratio of “Tier 1 capital” to risk-adjusted assets, the Senate committee statement said. Such capital is made up of cash, the value of common stock and some types of preferred stock, reduced by unrealized losses. It correlates to bank liquidity and stability as a measure of an institution’s financial health.
Of concern are instances where the holding company is also the insurer — as with a mutual, a fraternal or a reciprocal insurer, Spiezio said. In those cases, the holding company is the insurer, she said.
The company, as the insurer, is subject to insurance solvency rules — risk-based capital rules, which are different from Tier 1 capital of banks, Spiezio said. The law is now in the rule-making process, which is done by the Federal Reserve.
Federal Deposit Insurance Corp. Chairman Sheila Bair, endorsed the amendment in a letter to Collins. Taxpayers “will no longer bail out large financial institutions,” Bair wrote.
Some life insurance parent companies acquired a bank or thrift to qualify for the Troubled Asset Relief Program, Spiezio said. Others already owned a bank or thrift before the TARP program existed, she said.
“TARP did not change public policy regarding capital and reserve requirements for banks or life insurers,” Spiezio said.
At the time of TARP, some life companies “thought it expedient to tap into taxpayer money” and sometimes bought low-capitalized thrifts or banks, Csiszar said. But now comes the price, he said.
“If you operate like a bank-like institution, the regulators will treat you like a bank — you can’t quack and be a goose at the same time,” Csiszar said.
The language reflects the lack of understanding in Congress about the differences between life insurance and banking, said Csiszar. Both banks and life insurers raise money through trust preferred securities, he said. Tier 1 capital is “clearly directed at banks but it is broad enough to catch any organization that poses a systemic risk.”
If trust preferreds don’t count toward Tier 1 capital, “there might be a shortage problem,” Csiszar said.
Life insurers may have holdings that would fit into the Tier 1 capital bucket but their capital and surplus and reserve requirements are regulated under state insurance law, she said.
Some insurers would need to raise money at a potentially higher cost of capital, Csiszar said. Possible rating downgrades or regulatory action also could occur, he said.
The risks of banks and life insurers are much different, Spiezio said. If someone deposits $50,000 in Citibank today, they can withdraw it tomorrow, she said. But if someone pays $50,000 to a life insurance company for a policy, “that liability, hopefully, doesn’t come due for another 40 or 50 years.”
(By Fran Matso Lysiak, senior associate editor, BestWeek: firstname.lastname@example.org)