Filed Under:Your Practice, Regulatory

Senate bill would ease Section 171 impact on insurers

Legislation was introduced in the Senate late Thursday that would provide the Federal Reserve Board with the authority it needs to tailor capital standards of insurers it oversees.

The bill was introduced with bipartisan support by five senators, signaling that it has support strong enough to allow it to pass the Senate. There also appears to be strong support to do so in the House.

However, the House leaves for its August recess next Wednesday, July 31, and the Senate next Friday, August 2, so it is unlikely the legislation will receive congressional action until the fall.

The House and Senate both reconvene September 9.

The American Council of Life Insurers (ACLI) immediately issued a statement voicing strong support for the legislation.

Both life and property casualty insurers, as well as their trade groups, have been urging both the Fed and Congress to provide such flexibility since the Fed started to implement the Dodd-Frank financial services reform law last year.

In comments to members of Congress through testimony and correspondence, the Fed has strongly signaled it is prepared to regulate insurers under capital standards more applicable to them, but that Sec. 171 ties its hands, and it needs legislation specifically addressing the issue.

In a final rule published July 2, the Fed gave Congress time to act when it provided insurers a respite until 2015 from the Basel III capital regimen.

The Fed has interpreted the language of Sec. 171 as requiring federal agencies to apply consolidated minimum risk-based and leverage capital requirements for bank holding companies and savings and loan holding companies, “that are no less than the generally applicable capital requirements that apply to insured depository institutions under the prompt corrective action framework” imposed under a 1991 law.

That law, the Federal Deposit Insurance Corporation Improvement Act, was designed to give the FDIC authority to act to try to save troubled banks before they actually fail, and the Fed has apparently decided that Sec. 171 requires it to use the same capital standards used in regulating banks to insurance companies that operate thrifts.

The bill was introduced by Democratic Sens. Sherrod Brown, Ohio, and John Tester, Montana, and Republicans Mike Johanns, Nebraska, Mark Kirk, Illinois and Pat Toomey, Pennsylvania.

The law, if enacted, would allow the Fed to oversee insurers that operate savings and loan holding companies, as well as those that must be governed under the Basel III regulatory standards. 

However, insurers designated systemically important will have to comply with heightened capital standards, although the Fed has also signaled that it is willing to tailor those capital standards to accommodate the business model of insurers.

The bill is likely in response to a letter sent by Federal Reserve Chairman Ben Bernanke to 24 senators February 6, which said the Fed interpreted Sec. 171 as mandating imposition of bank-centric standards when regulating insurers.

That stance was reiterated by Bernanke in answer to a question posed last week by a House member during his semi-annual testimony to Congress on the state of the economy and Fed monetary policy.

Fed. Gov. Daniel K. Tarullo said the same thing in congressional testimony July 11.

The ACLI statement said that:

"Life insurance companies should be subject to capital rules that are designed specifically for the types of risks life insurers assume. ACLI strongly opposes applying bank-centric capital standards to life insurers. Bank-centric standards are a poor fit for life insurers, who assume substantially different types of risks than banks. Inappropriate capital standards could affect the price and availability of financial protection for families and retirees. Moreover, applying these standards only to certain insurers may create a competitive imbalance in the marketplace. We look forward to studying the legislation and working with [Congress] on an issue that has important implications for how we serve our customers."

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