Filed Under:Markets, Affluent

House Subcommittee to Address Bills to Rollback Federal Oversight

Mike McRaith, Director, Federal Insurance Office
Mike McRaith, Director, Federal Insurance Office

WASHINGTON—A House subcommittee will hold a hearing Wednesday and the main subject will be three pieces of legislation seeking to severely roll back federal authority to oversee insurance companies gained in the 2010 Dodd-Frank financial services reform law.

The House Financial Services Committee (FSC) is not expected to announce until Monday at the earliest that its Housing and Community Opportunity Subcommittee Hearing will hold a hearing on the insurance oversight-related proposals.

Committee officials were not available to comment because the office was closed for Veteran’s Day.

The hearing will deal with three draft bills crafted by officials of the Property Casualty Insurers Association of America and officials with the National Association if Insurance Commissioners (NAIC).

One would revoke the authority of the Federal Insurance Office (FIO) and the Office of Financial Research (OFR) within the Treasury to subpoena information from insurance companies.

The second would “explicitly and entirely” exclude insurance companies, including mutual insurance holding companies, from the Federal Deposit Insurance Corporation’s (FDIC) “orderly liquidation authority” for troubled large non-banks.

Moreover, the provision would limit the ability of federal regulators to ask large insurers to pay for the failure of a “too-big-to-fail” institution that is being liquidated.

It would do so by prohibiting the FDIC from counting insurance assets, liabilities, or revenues in its assessments on financial firms to pay for shortfalls when the assets of a failed firm are insufficient to pay for the failed firm’s resolution under the FDIC’s “orderly liquidation authority.”

Proposed legislation would also preclude the Federal Reserve from establishing higher prudential financial standards to troubled insurance companies it would oversee as ordered by the Financial Stability Oversight Council (FSOC).

Specifically, capital requirements, risk-based capital requirements and accounting standards on insurers overseen by the Fed as systemically significant could not be required to have higher capital requirements than those imposed by state regulators.

Testifying at the hearing on behalf of the NAIC will be Joseph Torti, III, head of the Division of Insurance in Rhode Island; Michael Lanza, executive vice president of Selective Insurance Group on behalf of the PCI; and  Daniel Schwarcz, associate professor of law at the University of Minnesota and an NAIC consumer representative.

The Fed and the FDIC turned down invitations to send witnesses to the hearing. The Treasury Department, which houses the FSOC, the FIO and the OFR, were not asked to send witnesses.

These issues were not brought up when the full committee heard testimony several weeks ago from Michael McRaith, FIO director.

At the moment McRaith is in the process of hiring people with insurance accounting backgrounds, including someone who formerly worked for the Florida Office of Insurance, to work at the FIO, according to sources.

One industry lawyer, who declined to be identified by name, said the legislation would have the potential for barring the Fed from enforcing provisions of the Volcker Rule on insurers. These would include ensuring that insurers complied with the exemption from the Volcker rule for insurers who followed state laws regarding separate account and general account activity.

The source also voiced concern that the accounting provision could intrude on the Securities and Exchange Commission’s (SEC) authority to oversee insurance products deemed securities by the Supreme Court, such as variable annuities. This lawyer indicated that it was possible that the SEC’s long-recognized authority to impose accounting rules and to exempt insurance company from federal rules would also be questioned by such laws.

According to several industry lawyers, the laws are being sought by the NAIC to limit the intrusion of federal authorities to regulate insurers to the largest extent possible.

As to the subpoena power, House FSC staffers said that insurance companies have complained that this power “may result in overly burdensome requests that will be costly to comply with and may also be duplicative of other data collection efforts already undertaken by state regulators and other federal agencies.”

It would require Treasury and Fed officials to obtain information about insurance companies through the insurance company’s state regulator, another federal agency, or public source. The proposal also requires that these federal entities, as well as state regulators, maintain the confidentiality of nonpublic data obtained from or shared with other federal and state regulators.

The second proposed law would also put state regulators, not the FDIC, in the driver’s seat in winding down a troubled large insurance company.

State regulators would also have authority under the draft law to deal with policyholders who are typically protected by a state-administered guaranty fund.

The proposal also prohibits the FDIC from obtaining a lien on an insurance company’s assets without the written consent of the insurance company’s state regulator.

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