The insurance industry has been helping birth new legislation that would address one of the most vexing issues for insurers in the Federal Reserve's stable of supervision.
H.R. 2140, Insurance Capital and Accounting Standards Act of 2013, introduced in the House by Rep. Gary G. Miller, R-Calif., and Carolyn McCarthy, D-N.Y., would offer relief from the Dodd-Frank Act requirement that the Fed’s proposed capital standards for banks must apply also to nonbanks, such as insurers, if they fall under Fed supervision.
The bill was introduced May 23 and immediately lauded by the life insurance industry.
Insurers that are or could be under the Fed’s supervision include those with thrift holding companies such as State Farm and TIAA-Cref and some banks insurance subsidiaries, plus any insurer designated systemically important financial institution (SIFI).
Insurers who have thrifts have tried to de-thrift, some successfully, others not, to get out from under the requirement.
Specifically, the bill would still preserve capital standards for insurers but make sure that the capital standards for insurance companies are aligned with their asset and risk profile. The capital would be matched to the liabilities and risk-based capital, the hallmark of insurers would hold sway.
The issue is important for insurers, who worry that bank capital rules don’t make sense for their structure and business and could actually hurt their solvency if imposed.
Miller stated, "the Federal Reserve is mixing apples and oranges by imposing bank-centric rules on insurance companies, which have completely different business models and capital structures. As written, this proposal will lessen the availability and increase overall costs of insurance products and services to consumers and businesses in my district and across the country.”
Last year, the Federal Reserve Board proposed new capital requirements for all financial institutions under Basel III.
The Fed’s proposal would require insurance companies to meet the same capital standards as banks, without regard to the distinctly different risk profile and business model of insurance companies, under Section 171 of the Dodd-Frank Act, according to Miller.
Life insurance companies should always be subject to capital rules designed specifically for the types of risks they assume and insurance risk-based capital is the appropriate benchmark for life insurers, argue insurers.
Indeed, insurers have been trying to find a way out of Section 171 for some time, and the Federal Reserve lawyers have also been looking at the language. Many letters have been written from industry, a group of senators led by Sen. Sherrod Brown, D-Ohio, even Sen. Susan Collins, R-Maine, for whom Section 171 is named, in attempts to alleviate the requirements. More recently, U.S. Senate Banking, Housing and Urban Affairs Committee Chairman Tim Johnson, D-S.D., and Ranking Member Mike Crapo, R-Idaho, joined the many voices in Congress protesting proposed capital standards under Basel III as applied to community banks, and for that matter, insurance companies with thrifts, in a February letter.
The Johnson letter to the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp., urged the regulators to carefully consider the impact of the proposals on community banks and insurance companies, and to avoid unintended consequences.
Another section of Dodd-Frank appears to give flexibility to bank regulators in crafting standards for nonbank companies, while section 171, which appears airtight, takes it away. Still, no route has yet been abandoned as the industry’s top legal team tries to parse Section 171 in a way that would excuse insurance companies from what the industry and Miller call “one size fits all” requirements. After many months, no relief has been offered as the letters get longer and more specific.
All told, there are about two dozen savings and loan holding company (SLHC) insurers and potential two to three large insurers that will become SIFIs in the next year or so. Prudential Insurance, MassMutual and Northwestern have dethrifted and The Principal is in the process of doing so.
But even if there are only a few, and there are a few large insurers possibly subject to the Federal Reserve’s capital proposals now, many in the industry worry the requirements for a few would change the market for all by pushing others to adopt more stringent capital, or create product pricing and portfolio trading discordance
“The issue has always had support from both Democrats and Republicans, and the bill is also bipartisan with Reps. Miller and McCarthy as co-sponsors. That suggests a good chance of the bill being able to move,” stated Steve Brostoff with the American Council of Life Insurers (ACLI).
“The Federal Reserve Board, under its interpretation of the Dodd-Frank Act, has proposed applying the Basel III bank capital rules to such companies. This would be wholly inappropriate. Banks and life insurers have significantly different balance sheet characteristics and business models,” stated the ACLI, which is still reviewing the bill.
Stephen Zielezienski, general counsel for the American Insurance Association (AIA), noted that H.R. 2140 addresses the concern of "inappropriate capital standards."
"Regulated property-casualty insurers present little, if any, systemic threat and should not be subjected to heightened prudential supervision at the federal level. The industry business model, the supporting regulatory architecture, the large number of competitors, and conservative management and investment practices employed in the property-casualty insurance industry help reinforce that conclusion,” the AIA general counsel said.
The NAIC is looking at the bill, but had no comment at this time.
The Fed did not respond by press time. The Senate Banking Committee did not respond with any word on whether it would consider a companion bill.
The office of Sen. Brown., who wrote last fall that “any regulatory regime must acknowledge how insurance companies rely upon long term assets to find long-term liabilities,” in contrast to banks short-term funding needs, said he was reviewing the bill.