Insurers which operate thrifts, organized as savings and loan holding companies, will be temporarily exempt from new tighter capital standards imposed on larger financial institutions under the Basel III capital regimen, the Federal Reserve Board opined today in a new final rule.
Charles Landgraf, a top insurance industry lawyer and partner with Arnold & Porter, who has been engaged by several insurers on the capital issue, said, “It is encouraging to see that the board has recognized further evaluation is needed before coming up with any new capital standards for insurance groups who happen to be thrift holding companies. Less positive are the implications of the board’s statement that it ‘may adjust application of [bank capital] standards’ to nonbank financial companies that are designated SIFIs. ”
Landgraf added that, “Some work still needs to be done, but this acknowledges that Section 171 (the Collins amendment to the Dodd-Frank Act) can be read as the [industry lawyers] have suggested.”
In comments inconsistent with the views of the industry lawyer and property and casualty insurance industry trade groups, the American Council of Life Insurers criticized the final rule.
“We maintain that it is inappropriate for the Fed to apply bank-centric capital requirements to any life insurer, which is consistent with the intent of the bi-partisan Insurance Capital and Accounting Standards Act (H.R. 2140),” an American Council of Life Insurers (ACLI) spokesman said.
“We will continue to support a more appropriate approach for all life insurance companies where life insurer capital requirements differ from capital requirements for banks,” the ACLI spokesman said.
U.S. Rep. Gary G. Miller, R-Ca., who introduced H.R. 2140 in May, said his legislation is still necessary.
"I applaud the Federal Reserve's decision to exempt insurance companies from the Basel III capital standards until they can perform further evaluation. While this is welcome news my legislation is still necessary since current law does not require the Fed to use insurance-specific regulatory standards," Miller said in a statement to National Underwriter.
The Fed also said in the new regulation that insurers will be exempt from capital standards imposed on large banks, do not have to use Generally Accepted Accounting Principles to prove they are exempt, but will be allowed to estimate.
The new rule also said that the Fed will implement a separate capital framework for insurance savings and loan holding companies (SLHCs) to comply with by 2015.
The final rule gives insurers a great deal of what they hoped for in relation to implementing the Basel III regulatory standards, which is a framework centered on imposing higher bank capital standards in the wake of the 2007-2010 financial crisis.
It also deals with new regulatory requirements for insurers imposed by the Dodd-Frank financial services reform law.
It appears that even insurers designated systemically significant will be granted some flexibility in complying with the heightened capital standards that will be imposed on nonbank SIFIs.
American International Group (AIG) will accept and Prudential Financial will fight the SIFI designation, the companies announced separately late Tuesday.
An industry lawyer cited the testimony of Michael Gibson, Fed director of the Division of Banking Supervision and Regulation, testified before the House Financial Services Committee May 16 that the agency has “made it clear” in its proposal for enhanced prudential standards that “we do intend to tailor” the standards to the characteristics of the companies that are designated by the Financial Stability Oversight Council (FSOC.)
He said the Fed has proposed a single set of standards that they are applying to both the bank holding companies and the nonbank companies.
“But we have said that once the firms are designated, we will consider tailoring the standards — and the Dodd-Frank Act explicitly gives us the authority to do that,” Gibson said.
The new rules will require large banks and to maintain a total capital ratio of 8 percent of risk-weighted assets. It will also allow the Fed to penalize them for excess reliance upon short-term funding; this is an attempt to stem short-term volatility in funding.
“During the public comment period, the American Insurance Association urged the Federal Reserve Board to not apply bank-centric rules to the insurance industry,” said J. Stephen Zielezienski, AIA senior vice president and general counsel, in comments consistent with the views of all insurers and trade groups. They waged a multi-front war, through comment letters, visits with Fed officials, and by enlisting members of Congress, in order to persuade federal regulators not to adopt what they describe as “bank-centric” rules on insurers.
He said that, “We are pleased that the board’s final rule provides a temporary exemption for savings and loan holding companies that derive more than 25 percent of their total consolidated assets from insurance underwriting activities.
“We hope that, as the board further reviews its action, it will make this exemption permanent so that companies that are actively engaged in the business of insurance and subject to board supervision will not be forced to adopt an inappropriate capital framework that could weaken their ability to compete,” Zielezienski said.
“We are still reviewing the entire 972-page rule in-depth, but the rule appears to rightfully acknowledge the unique nature of the business of insurance and excludes companies that are predominantly engaged in it from the greater capital requirements being placed on banks,” said Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies.
Grande said that “any capital standards for insurers should consider risk exposures that fit the business of insurance, including asset risk, underwriting risk, interest rate risk and business risk.”
Grande also said that “Basel III capital standards that don’t fit insurers have no place in insurance solvency supervision.
“The Federal Reserve was told that it was not Congress’s intent under Dodd-Frank that federal regulators supplant state-based insurance regulation with a bank-centric capital regime. The rule appears be in accord with these requirements,” Grande said.
Specifically, the board said in the final rule that, “After considering the comments received from SLHCs substantially engaged in commercial activities or insurance underwriting activities, the board has decided to consider further the development of appropriate capital requirements for these companies, taking into consideration information provided by commenters as well as information gained through the supervisory process.
“The board will explore further whether and how the proposed rule should be modified for these companies in a manner consistent with section 171 (the Collins Amendment) of the Dodd-Frank Act and safety and soundness concern,” the Fed said.
UPDATED With Congressman Miller's statement.