The American Council of Life Insurers (ACLI) is concerned about the Federal Reserve Board’s approach to stress testing as applied to life insurance companies, arguing that a bank model is too overbearing for an insurer, and also suggesting that there be little to no public disclosure of stress test results of any insurer, only banks.
The ACLI wrote of its concerns on the board's policy statement on the scenario design framework for stress testing in a letter to the Fed mid-month January. The national trade association has more than 300 member companies representing more than 90 percent of the assets and premiums of the life insurance and annuity industry in the U.S.
According to the Fed policy statement, the Fed would subject a nonbank company designated as a systemically significant nonbank financial (SIFI) company by the Financial Stability Oversight Council (FSOC) to a stress testing regime identical to that applied by the board to bank holding companies with $50 billion or more in total consolidated assets. And the life insurance industry doesn’t want that.
As well as SIFIs, the multiple insurers with savings and loans, by Dodd-Frank default under Fed supervision, might also be caught up in this stress test scenario, the ACLI worries. There are about two dozen insurers – including AIG – that could fall under the SIFI designation. Many are property casualty companies, a couple with limited-purpose savings associations, such as Northwestern, have dethrifted and others are trying to while also attempting to stave off onerous capital requirements under Basel III. Insurance CFOs earlier suggested in an Oct. 22 letter to the banking regulators that because insurance companies that have savings and loans have not been regulated by the Fed previously, new capital requirements should not be applicable until July 15. The Fed did postpone the Basel II requirements after Congress weighed in, as well.
Although the issue is not specifically raised in the policy statement, “we have similar concerns should the board consider applying the stress testing framework as outlined in the policy statement to any savings and loan holding company (SLHC) that is primarily a life insurance enterprise,” the letter stated.
The ACLI urged in its Jan. 14 letter that “the board should tailor any stress testing requirements in recognition of the significant differences between large BHCs and nonbank covered companies,” read the letter, written by Julie Spiezio, ACLI deputy general counsel, to Fed Chairman Ben Bernanke.
Insurance companies face risks that are in many instances unique to their business model, said the ACLI, repeating an insurance industry argument often used in discussion before the Fed and others.
ACLI has written to the Fed before, and met with its officials, to argue that the Fed’s proposed rules do not appropriately distinguish between bank holding companies and nonbank financial companies that are designated as systemically important under section 113 of the Dodd-Frank Act (Non-bank Covered Companies), and that risk assessment should be tailored to life insurers, not hit with the same regulatory cudgel.
Underpinning this argument, the ACLI has stated that traditional core activities of life insurance companies do not present a systemic risk to the financial stability of the United States, and that the risk measured should be the risk that matters, the life industry says.
FSOC has yet to designate an insurer as a SIFI, but is expected to – it has requested private data from AIG and Prudential, and is weighing it in consideration of a possible SIFI designation – although it is unclear about the timing of any notice or appeal of such a designation.
“To account for these risks, any stress testing regime for a nonbank covered company should incorporate risks that actually impact the nonbank covered company,” Spiezio wrote.
For example, stress testing scenarios for these insurers caught under Fed supervision should de-emphasize shocks arising from traditional banking activities because risks arising from traditional banking activities such as commercial and consumer lending are likely to be of comparatively less importance to companies like insurers, the ACLI argues.
The ACLI is also concerned about public disclosure of stress test results of a nonbank-covered company's (i.e. insurance company) stress test results could create additional problems, one that won’t occur with public disclosure of BHC's stress test results.
Such news could prompt a sell-off of stock.
“The marketplace has familiarity with and thus will be better able to interpret a BHC's stress test results. By contrast, it is unclear whether disclosure of a nonbank covered company's stress test results would provide the marketplace with useful information concerning a company's overall risk profile or response to stressed conditions,” Spiezio wrote on behalf of the ACLI.
“The Board should be cautious in assuming that public disclosure of a nonbank covered company's stress test results will provide the same benefit as public disclosure of a BHC's stress test results,” the ACLI letter warned.
Aside from the select 19 previously tested BHCs (which included MetLife before it began the process to sell off its bank to GE Capital this month; MetLife failed its BHC stress test last winter), companies subject to the board's final rules for Dodd-Frank stress testing will be required to comply with the final rule beginning in October 2013.
Failing a stress test has serious consequences. In MetLife’s first reaction to the Fed decision last March, Steven Kandarian, chairman, CEO and president, said that amongst the things MetLife was penalized for was the holding of funds of variable annuity customers in separate accounts. Kandarian also said that the Fed’s methodology unfairly resulted in “harsh treatment” for MetLife’s corporate bond portfolio. MetLife was also not permitted by the Fed to help its books by buying back shares of its own stock.
Companies with between $10 billion and $50 billion in total assets that begin conducting their first company-run stress test in in the fall of 2013 will not have to publicly disclose the results of that first stress test.
The Federal Reserve Board on Tuesday published its two final rules with stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies. The final rules implement sections 165(i)(1) and (i)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act that require supervisory and company-run stress tests.
Why stress testing?
"Implementation of the Dodd-Frank stress test requirement is an important step in the Federal Reserve's efforts to promote the health of the financial sector," Fed Governor Daniel Tarullo stated in October when the Fed published its two final rules with stress testing requirements for certain bank holding companies, state member banks, and savings and loan holding companies.
The final rules implement sections 165(i)(1) and (i)(2) of the Dodd-Frank Act. "Stress testing is a key tool to ensure that financial companies have enough capital to weather a severe economic downturn without posing a risk to their communities, other financial institutions, or to the general economy," Tarullo stated.