A top official of the American Council of Life Insurers made clear to the House Financial Services Committee last week that life insurers acknowledge that federal regulators will be playing an increasing role in their lives, and that it is best for all concerned that everyone work together in order to get the job done at the lowest possible cost.
The comments by Gary Hughes, ACLI executive vice president and general counsel, put a surprising light on a hearing that was convened by the conservative majority to express disdain for any type of federal regulation.
He did voice concern with the Federal Reserve Board. On holding company standards, Hughes said that any holding company capital requirements made applicable to a life insurer must be compatible with the company's basic business model. “Unfortunately, the scenario we face due to the Federal Reserve's interpretation of Dodd-Frank is one of applying bank-centric regulatory regime to a life insurer,” he said.
“The life insurance business is fundamentally different than the business of banking,” Hughes said. He said that assets, liabilities, reserves, capital, accounting, products, each of these elements of insurance structure and regulation differs significantly from those of commercial banks.
“The issue here is not whether these life insurers should be subject to holding company capital standards,” Hughes said. “They have accepted the fact they will be. The issue is making certain those standards actually work for a life insurer.”
He then noted that the whole purpose of these provisions of Dodd-Frank is to stabilize the U.S. financial system. “Disrupting the operations of well-run insurance companies by applying ill-fitting standards is fundamentally at odds with that purpose and shouldn't occur under any circumstances,” Hughes said.
But, asked point-blank by Rep. Michael Capuano, D-Mass., ranking minority member of the Housing &Insurance subcommittee of the House Financial Services whether he supported the Federal Insurance Office or wanted it repealed, Hughes said, “We absolutely support FIO.”
His comments were impliedly support of Michael McRaith, FIO director.
McRaith testified at the hearing that, the state versus federal oversight discussion is a “binary debate” that is a relic of a bygone era.
In contrast to previous eras, the world of insurance today is vast, complex, diverse and global, McRaith said.
It is “not as it was, or as one might wish it were,” he said.
In his prepared testimony, Hughes said, “In the very near future, a major segment of the U.S. insurance business will have material aspects of its capital structure dictated or influenced by someone other than a state insurance regulator.”
The point, here, he said, “is that life insurance regulation in the U.S. can no longer be viewed as a purely domestic matter.”
McRaith defended FIO’s role in the international insurance market, saying that FIO is unlikely to sit back and be a spectator, and that it will do what it believes is in the “national interest” for such a critical component of the economy and consumers’ lives.
In his comments, Hughes said that the regulators must work together. He said if the capital standards of the states, the Federal Reserve (FSB), the International Association of Insurance Supervisors (IAIS) and the European Union are not generally consistent,” the resulting competitive disparities mainly involving the relative cost of capital will significantly disrupt the U.S. and the global life insurance markets,” Hughes said.
“That's why we believe it's imperative for all of our U.S. representatives to work on a unified and constructive basis with the FSB and with other international standard-setting bodies,” Hughes testified.
Hughes’ comments were not in line with that of the subcommittee chairman, Rep. Randy Neugebauer, R-Texas. Neugebauer, for example, challenged McRaith on the IAIS’ proposal to establish ComFrame as a model for the supervision of internationally active insurance groups. “Identify the problem,” Neugebauer said to McRaith. ComFrame seems to be “a solution in search of a problem,” he said.
By contrast, Hughes said the regulatory landscape for U.S. life insurers is “changing dramatically.”
He said the Dodd-Frank Act now gives the Federal Reserve a significant regulatory role with respect to those insurers that are designated as systemically important. Hughes noted that two of the ACLI's member companies have received that designation, and one additional company is under review for possible designation. Dodd-Frank also gives the Federal Reserve jurisdiction over another 12 of our member companies that control savings and loan institutions, Hughes said.
At the same time, Hughes said, the Financial Stability Board is directing the International Association of Insurance Supervisors (IAIS) to develop group capital and group supervisory standards applicable to internationally active insurance groups. We estimate that at least 18 of our member companies fall into this category, Hughes said.
Various federal regulatory agencies are now directly involved in matters going to the very heart of a life insurer's financial structure, he said. “And while the Federal Reserve and other agencies are making a concerted effort to enhance their understanding of our business, there's still a significant knowledge gap,” Hughes said. “We believe the FIO can be invaluable in helping fill this gap, given its mission of being the federal repository of information on insurance and its regulation.”
Hughes said it is also “well-positioned” to interact with the NAIC, the states, the FSB, the IAIS, and the EU, as global capital and supervisory standards evolve. “It's critical for that evolution to occur on a rational and consistent basis, and that will not happen absent strong advocacy by the FIO and the states, all working in concert and working toward common goals,” Hughes said.
As to the FIO report itself, Hughes said that the ACLI overall believes the FIO report, published in December, “presents a fair and balanced picture of our state-based system of regulation and the various challenges it faces.”