MetLife “won’t keep systemic risk regulators up at night,” its chairman and CEO said today in Washington in describing in stark terms why the insurers should not be designated as systemically significant (SIFI).
In comments at a Capital Markets Summit sponsored by the U.S. Chamber of Commerce, Steven Kandarian said that “life insurers as SIFIs are a case of mistaken identity.”
The comments were part of an all-out campaign by MetLife and Kandarian to retain the company’s current status outside of the scope of federal oversight.
He reiterated that the life insurance business did not cause the financial crisis, and that imposing bank-centric regulations on certain life insurance companies — however well-intentioned the purpose — “would negatively affect the availability and affordability of financial protection for consumers.”
Kandarian said that the Dodd-Frank financial services reform law defines a SIFI as a company whose failure “could pose a threat to the financial stability of the U.S.”
He said the FSOC has clarified that “such a threat only exists if ‘there would be an impairment … of financial market functioning that would be sufficiently severe to inflict significant damage to the broader economy.’ ”
Simply put, Kandarian said, “there is no evidence that any traditional life insurance company meets that test.”
Kandarian acknowledged that the need for the federal government to bail out a hugely troubled AIG in 2008 “is the elephant in the room” as the government considers whether to designate some insurance companies as SIFIs.
But, he said, “AIG’s life insurance subsidiaries did not cause the company’s financial distress. They were victims of it.”
See also: Sympathy for AIG
He cited the impact of AIG’s involvement with credit default swaps as the primary reason for its near failure, adding: “None of this is to deny that regulators should closely examine the activities of life insurance companies. But, in my view, there is a better way to accomplish this goal than by potentially singling out three of the nation’s 895 insurance companies for SIFI designation.”
Instead of SIFIs, Kandarian said, a better approach to enhanced regulation of insurance companies would be to target those activities that caused the financial crisis in the first place.
“In short, policymakers should adopt an activities-based approach to systemic risk, rather than an institutions-based approach,” Kandarian said.
He said such an approach “would recognize that traditional life insurance companies did not cause the financial crisis.
“It would recognize that applying bank-centric capital rules to a few large insurers would result in competitive distortions and harm to consumers,” he added. “And it would recognize that preserving robust competition in the life insurance sector is the best way to maximize the availability and affordability of financial protection for consumers.”
Kandarian made his comments against the background of what some regard as imminent action by the Financial Stability Oversight Council (FSOC) to designate certain nonbanks, such as insurers, as SIFIs, therefore subjecting them to oversight by the Federal Reserve Board and requiring enhanced capital as well as additional oversight.
AIG and Prudential Financial Inc., have publically disclosed that they are in the third and final stage of the FSOC review of SIFI designation. MetLife has repeatedly denied that it is being evaluated as a SIFI, although it acknowledges that it is a candidate.
The Fed set the stage for the FSOC action last week when it adopted a final rule that establishes the requirements for determining when a company is “predominantly engaged in financial activities.”
The final rule will be designated as 12 C.F.R. Part 242 – Regulation PP.
The requirements set forth in the final rule will be used by the FSOC when it considers the potential designation of a nonbank financial company for consolidated supervision by the FRB upon the determination by the FSOC that such a company could pose a threat to U.S. financial stability, according to lawyers at Goodwin Procter.
In an SEC statement earlier this week justifying its decision to divest itself of its savings and loan, W.R. Berkley & Co. said federal oversight meant it would have become subject to certain prior notification requirements and restrictions on dividends, stock repurchases, distributions, transactions with affiliates and compensation plans, and additional requirements related to its shareholders, management reporting and capital adequacy.