Ahead of a comment period deadline, almost two dozen members of the Senate from both sides of the aisle, led by Sen. Sherrod Brown (D-Ohio) and Sen. Mike Johanns (R-Neb.), sent a letter to the top federal banking regulators, including Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, warning them that the application of a bank-centric capital regime to the insurance industry would fundamentally alter the nature of the business, undermine prudential supervision and unintentionally harm insurance policyholders, savers and retirees.
The letter, also sent to the heads of the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), raised the question of Congress’ intent in designing the rules—namely that insurers should be treated differently in line with their business models.
The issue involves looming capital standards directed at insurers as well as banks from a regulatory smorgasbord of new rules that grew out of the 2010 Dodd-Frank Act (Dodd-Frank).
The Federal Reserve, after Congress interceded in August on behalf of both banks’ and insurers’ lobbying efforts, has already extended the comment period until October 22, 2012, on the proposed rulemaking that would revise and replace current capital rules. The proposals by the Federal Reserve, the FDIC and the OCC would implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and The Collins Amendment (an amendment to Dodd-Frank sponsored by Sen. Susan Collins (R-Maine), mandating that federal regulators impose consolidated capital standards on thrift and bank holding companies that they supervise).
Insurers with thrifts, which number about 25, from medium-sized Midwestern plains insurers with small savings and loans to large life and property companies like Principal Financial, Prudential Financial, TIAA-Cref and State Farm are considered Savings & Loan Holding Companies (SLHCs) and will be subject to Basel III international standards for capital and liquidity by the Federal Reserve as a consolidated regulator at the holding company level.
The American Council of Life Insurers (ACLI) also sent a letter late last week to the same banking regulators, enumerating in detail how a bank or thrift holding company with an insurance subsidiary would be required to hold higher capital against the same assets as a bank or thrift without an insurance company.
The ACLI’s Julie Spiezio explained to the federal banking supervisors that the effects of the capital requirements on insurers would be worse than on banks due to their need to invest in assets like long-term debt in order match long-dated obligations and hold them for long periods of time thus exposing them to more volatility in their capital ratios and therefore triggering other actions.
“First and foremost, increased volatility will cause significant fluctuations in insurers’ regulatory capital ratios. These fluctuations will be significantly greater in magnitude than those experienced by traditional banking organizations and may cause the unintended result of having the insurers’ capital ratios appear lower than warranted by the overall safety and soundness of the organization,” Spiezio wrote on October 12.
Insurers have never before been subject to Basel requirements or consolidated capital requirements and the extremely short transition time is unduly burdensome and contrary to the intent of Congress under the Collins rule, they argue.
Staffers from Collins' office have been said to have visited the offices of the insurance regulatory association staff to explain that Collins didn’t actually mean for the amendment to apply to insurers, but whether that argument would win the day, even if made by Collins herself to the Fed, is disputed—some say a statute is a statute. The Fed could punt the issue back to the legislature to fix. A call to Collins’ office was not returned as of press time.
Aside from international measures being developed for multinational companies in a couple of project streams by the International Association of Insurance Supervisors (IAIS) under the G-20’s Financial Stability Board (FSB), new capital standards—as yet unspecified—will also apply to any insurer that may be designated systemically important (SIFI).
“Any final regulations should reflect the will of Congress to respect the distinctions between insurance and banking,” the Senators stated.
The Senators explained that the Committee Report that accompanied the Restoring American Financial Stability Act provided direction to the federal banking agencies to consider insurance companies’ existing regulatory requirements, accounting treatment, and unique capital structures in developing capital requirements for insurance entities.
The Senators also urged the banking regulators to provide insurance companies with an adequate transition period, fitting somewhere between these effective dates, in order to comply with any new capital rules.
“We are concerned that some of the proposed rules, as drafted, do not reflect the distinct nature of the insurance business or take into consideration the state risk-based capital system that was specifically developed for the insurance industry and refined over the past 20 years,” the Senators stated.
“While we recognize that Dodd-Frank directs the federal banking agencies to establish minimum capital standards on a consolidated basis, Congress did not intend for federal regulators to discard the state risk-based capital system in favor of a banking capital regime,” they stated in the letter.
More to the point, the ACLI stated that it “unequivocally believes that the current insurer risk-based capital system (RBC) is best suited to measure the capital needs of insurance companies and is therefore best suited to also meet the needs of the Board of Governors of the Federal Reserve System (the Board) when it assesses the capital adequacy of insurance company enterprises under these proposals.”
The ACLI finds a possible way to keep RBC, as well:
“...we believe there exists statutory authority for the Board to recognize insurer RBC as a methodology that can be used to meet the requirements under Section 171 of the Dodd-Frank. Section 171 provides that the risk-based and leverage capital requirements ‘shall not be less than’ nor ‘quantitatively lower than’ the generally applicable minimum requirements under Basel III,” Spiezio wrote.
"This language clearly empowers the Board to deem the insurance RBC framework and action levels as equivalent to the bank prompt corrective action regime so long as they are not 'less than' nor 'quantitatively lower than' the minimum bank risk-based and leverage capital requirements. Such equivalence is not only appropriate given the asset/liability mix of insurers as well as the longer liabilities insurers hold relative to banks, it recognizes a superior mechanism for assessing an insurer’s financial position. The language of Section 171 itself provides evidence that Congress did not intend that bank-centric capital requirements be imposed on appropriately regulated insurance companies, and we urge the Board to use this authority to develop an appropriate methodology for insurance entities utilizing insurer RBC," she continued.
The Senators pointed to a need for the bankers to acknowledge how insurance companies rely upon long-term assets to fund long-term liabilities while banks use a variety of bonds, equity, and short-term debt to fund their operations.
Insurers have repeatedly streamed into the Federal Reserve and a host of other supervisory bodies inside and outside the U.S. or met by phone to emphasize to them that bank liabilities are short-term and assets are long-term while the converse is true of insurance, which has liquid assets but longer-term liabilities.
Disrupting asset and liability business models would disrupt the insurance industry, insurers caught under the Fed’s new rules have complained. Meanwhile the Fed has been ramping up its insurance industry expertise.
According to sources, both parties don’t necessarily want this supervisory relationship with each other. Some insurers are concerned the Fed doesn’t want them to have banks for their members and policyholders and is trying to make them get rid of them. Meanwhile, the Fed’s delay of bank holding company MetLife’s stress test indicated to some that the Fed would rather not bother with the insurers but must under the statute. Some insurers are hoping to divest their thrifts if they can, without flooding the market or getting a bad price, while others say they are intrinsic to their business model and want to keep them.
The Federal Reserve Board announced first in August that it is considering delaying implementation for the annual company-run stress test requirements until September 2013. The delay would apply to insurers that have thrift holding companies as well as banks, with between $10 billion and $50 billion in total consolidated assets. Insurers with thrifts—any savings and loan holding company, in fact—would have a lower threshold of $10 million in assets once those holding companies become subject to minimum risk-based capital requirements.
MetLife restructured its bank sale deal with GE last month so that it would no longer have to fight for approval of the sale from the FDIC, but instead from the OCC, which is perceived as an easier channel.
Meanwhile, the Senators also voiced industry concern with the process and timeline of the proposed rules. There are various effective dates for different capital regulations—ranging from 2015 to 2018 for the Collins Amendment and Basel III, respectively.
“We urge you to provide insurance companies with an adequate transition period, fitting somewhere between these effective dates, to comply with any new capital rules. This will support your supervisory goals in minimizing disruption to insurance entities and their policyholders,” they wrote.
"The concerns raised by Sens. Brown and Johanns are shared by National Association of Mutual Insurance Companies (NAMIC) and the entire property/casualty insurance industry,“ stated Jimi Grande, Senior Vice President of Federal and Political Affairs at NAMIC.
“Imposing bank-centric standards on insurance companies fails to take into account the significant differences between insurers and banks in financial reporting, accounting standards, capital requirements, and other operational activities...NAMIC has repeatedly cautioned against a 'one-size-fits-all' approach and we are glad to see there is strong bipartisan consensus on Capitol Hill for the Fed to recognize the unique nature of the property/casualty insurance industry."
“I don't believe the Fed intends to force insurance companies designated as systemically significant (SIFI) into the bank stress test model and metrics without at least some adjustments to reflect some of the key differences in their business models (duration of liabilities, lower liquidity risk, etc.),” said John Nadel of Sterne Agee & Leach, Inc., New York in a note earlier this fall.
Other signatories include: Democratic Sens. Max Baucus, Mo.; Kay Hagan, N.C.; Chuck Schumer, N.Y.; John Tester, Mt.; Robert Menendez, N.J.; Tom Harkin, IA; Richard Durbin, Ill.; Richard Blumenthal, Ct.; Mark Udall, Co.; Jeff Merkley, Or.; Ben Nelson, NE.; and Republican Senators Mike Crapo, ID; Patrick Toomey, Pa.; Pat Roberts, KS; Jerry Moran, KS.; Roy Blunt, MO.; Kay Bailey Hutchison, Tx.; Chuck Grassley, IA.; Johnny Isakson, Ga., and Saxby Chambliss, Ga.