SEC Considers Insurer Exemption to Volcker Rule

The U.S. Securities and Exchange Commission is weighing industry calls to exempt insurance companies from the Volcker Rule, a provision of the Dodd-Frank Act that bars financial institutions from certain kinds of speculative investing.

Industry trade organizations argue that unless the exemption is granted, insurers could face severe financial pressures because many companies invest in hedge funds as a way to bolster their solvency and their ability to pay claims.

SEC Chairwoman Mary Schapiro recently told members of the Financial Services and General Government Subcommittee of the House Appropriations Committee that the SEC has the authority to grant exemptions to the Volcker Rule but the standard for doing so is high. Schapiro said the agency has received comment letters from a number of insurance trade organizations and insurers themselves. To date the agency has received more than 16,000 comment letters on the application of the Volcker Rule.

"Schapiro appeared to agree that insurers should be allowed to invest in hedge funds when she spoke to members of the subcommittee. But there was some question as to whether the SEC can make that fix through the rule-making process or whether it has to be done legislatively" said Jim Olsen, vice president of insurance accounting and investment at the Property Casualty Insurance Association of America. He said the Volcker Rule was not intended to bar insurance companies from investing in hedge funds.

"The Dodd-Frank is very clear in saying that as long as an insurer is adhering to state investment laws, which were specifically designed to govern insurance companies, they will be able to continue making investments as they were before the law," said Olsen, who drafted PCI's comment letter.

Jonathan Bergner, director of federal affairs for the National Association of Mutual Insurance Companies, said his organization also believes the SEC is moving closer to exempting insurance companies from the Volcker Rule. But there are still some issues that need to be worked out, Bergner said. "We think the exception included in the law should be read as broadly as possible," Bergner said.

The SEC is expected to make a ruling on the proposed exemption soon. The rule is set to go into effect on July 21.

"But in the meantime, while the SEC works it out, there is a lot of uncertainty in the market," Bergner said.

The Volcker Rule, named for former United States Federal Reserve Chairman Paul Volcker, is designed to keep commercial banks from proprietary trading and limits their ability to invest in hedge funds. While it is aimed at commercial investment banks like Goldman Sachs and Morgan Stanley, some insurers, particularly on the life insurance side, have argued they could be affected because they are affiliated with banks.

Last year, the Financial Stability Oversight Council said two types of insurers are subject to the Volcker Rule: those that are affiliates of insured banks or thrifts and nonbank financial companies supervised by the Federal Reserve.

Driven in part by the application of the Volcker Rule, MetLife Inc. announced last year it would be exiting the banking business in order to focus on its insurance operations (Best's News Service, July 21, 2011).

Olsen said the problem may have come as a result of human error in the drafting process. In one section, the proposed rule specifically mentions hedge funds as a type of investment vehicle insurers can invest in, but another section does not.

If the exemption is not granted, Olsen said, "Insurers would lose a very valuable investment genre at a time when many are already seeing reduced yields as a result of low interest rates. They still have to make decent returns to maintain their solvency and their ability to pay claims."

The National Association of Insurance Commissioners has also submitted a comment letter saying investments are "critical" to the insurance business model and the state-led regulatory scheme has done well in overseeing the types of investments insurers make.

"Investment laws and regulations provide limits on the type and extent of insurer investments, and examination of insurer investment portfolios to ensure compliance with such laws is part of the ongoing oversight by state insurance departments. As such, we do not think a review of such investment laws by the federal government would ever be necessary," the NAIC letter said.

(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)