As expected, legislation was introduced in both the House and Senate Tuesday aimed at clarifying that federal regulators must use state-based metrics in overseeing insurance companies.
The Senate version is expected to be added to legislation reauthorizing the Terrorism Risk Insurance Act that industry officials anticipate will be taken up by mid-May in the Senate Banking Committee.
The American Council of Life Insurers voiced strong support, as did all three primary property and casualty insurance trade groups voiced strong support for the legislation and urged its prompt passage. These include the National Association of Mutual Insurance Companies; the Property Casualty Insurers Association of America (PCI); the National Association of Mutual Insurance Companies (NAMIC) and the American Insurance Association (AIA).
S. 2270 was introduced by Sens. Susan Collins, R-Maine; Sherrod Brown, D-Ohio; Mike Johanns, R-Neb. The House bill, H.R. 4510, is sponsored by Reps. Gary Miller, R-Calif. and Carolyn McCarthy, D-N.Y. It is titled “the Insurance Capital Standards Clarification Act of 2014.”
“The bills introduced on April 29 update legislation previously introduced by the lawmakers on the topic. ACLI thanks Collins, Brown, Johanns, Miller and McCarthy for their continued leadership to ensure the appropriate application of capital standards for insurers,” the trade group said in a statement.
“ACLI strongly opposes the application of bank-centric capital standards to life insurance companies,” the statement said.
The bill clarifies Sec. 171 of the Dodd-Frank Act (DFA), which was sponsored by Collins. A statement by Miller and McCarthy says that their legislation “revises” Sec. 171, which “requires” the Federal Reserve to apply bank capital rules to insurance companies it supervises.
S. 2270 and H.R. 4510 “clarifies” that the Fed can apply insurance-based capital standards to the insurance portion of the business, while still keeping banking capital standards for the banking portion of the business.
It also prevents the Fed from requiring mutual insurance companies, such as State Farm, from preparing financial statements in accordance with generally accepted accounting principles when they are already preparing financial statements in accordance with state-based statutory accounting principles.
Collins, other senators and insurance industry officials in recent Senate testimony have challenged whether the language “requires” the Fed to use “bank-centric” methods in evaluating insurance financial statements as part of its mandates to oversee systemically important insurers as well as be the consolidated regulators of insurance companies which operate savings and loans. The Fed won that authority through provisions of the DFA.
The Miller/McCarthy statement supports Sec. 171 as interpreted by Fed general counsel Scott Alvarez. He has been backed by Fed chairman Ben Bernanke and Janet Yellen in an issue that has been boiling for several years.
While the industry and several members of the Senate have challenged the Alvarez interpretation in several hearings and in a number of statements, the Miller/McCarthy statement appeared conciliatory to the Fed.
“There is no question that robust capital standards for all of our nation’s financial institutions are essential to protecting our economy,” Miller said.
“However, if not properly applied, these standards can be detrimental to the economy. Capital standards need to be calibrated appropriately so that they can preserve the safety and soundness of various types of financial institutions. I look forward to working with my colleagues to ensure this legislation becomes law,” he added. “The Insurance Capital Standards Clarifications Act will help keep insurance products affordable by applying the correct capital standards to insurance companies that fall under the supervision of the Federal Reserve,” McCarthy said.
“This legislation will give the Federal Reserve more flexibility and help clarify the difference between the business of insurance and the business of banking,” she added. “I am pleased to support this common sense legislation which will play an important role in preventing future financial crises.”