FSOC Releases Danger List
January 19, 2011 by Arthur D. Postal
The Financial Stability Oversight Council (FSOC) has come out with the indicators it plans to use to decide whether a large insurer is shaky enough to need the attention of the Federal Reserve Board.
The criteria the FSOC would use to identify a systemically important troubled insurance company could include:
- Lack of substitutes for the financial services and products the company provides.
- Interconnectedness with other financial firms.
- Liquidity risk.
- Maturity mismatch.
- Existing regulatory scrutiny.
The criteria are described in a proposed regulation that the FSOC plans to publish in the Federal Register.
Each of the proposed critera “reflects a different dimension of a firm’s potential to experience material financial distress, as well as the nature, scope, size, scale, concentration, interconnectedness and mix of the company’s activities,” FSOC officials say.
THE VOLCKER RULE STUDY
The FSOC also has released a study on the Volcker Rule – a statute created by Section 619 of the Dodd-Frank Act that will put limits on the proprietary trading activities, hedge fund investments and private equity fund investments of financial institutions, including systemically important insurers, that benefit from federal deposit insurance or access to the Federal Reserve System discount window.
The drafters of the rule wanted to discourage financial institutions from gambling with government money while letting them continue to engage in normal asset management and hedging activities.
“For nonbank financial companies that are supervised by the [Federal Reserve] Board, the Volcker Rule does not expressly prohibit or limit any activities,” FSOC officials say in the Volcker Rule study. “Instead, the Volcker Rule requires that the Board adopt rules imposing additional capital charges or other restrictions on such companies to address the risks and conflicts of interest that the Volcker Rule was designed to address.”
FSOC officials note that the only insurance companies affected by the Volcker Rule would be those that are affiliates of federally insured banks or thrifts, and those that are supervised by the Federal Reserve Board.
“The investment activity of insurers is central to the overall insurance business model,” FSOC officials say.
Insurance company general account investments are permitted if “the appropriate federal banking agencies, after consultation with the [FSOC] and the relevant state insurance commissioners, have not jointly determined that such investment laws, regulations and written guidance are insufficient to protect the safety and soundness of the banking entity, or of the financial stability of the United States,” officials say.
Federal regulatory agencies will have to come up with an approach for evaluating state insurance investment laws, regulations and guidance, and for working with the FSOC and state insurance regulators to determine whether the investment laws, regulations or guidance in a specific state are so weak that they threaten the soundness of a banking entity or the financial stability of the United States, officials say.
The term “general account” is not statutorily defined but is “a fairly well recognized insurance accounting term of art,” officials say. “A general account represents all assets of the insurer that are available to satisfy its overall obligations.It does not include any separate account assets.”
Federal regulatory agencies “should consider how insurance companies invest separately on behalf of customers” and avoid defining insurance company separate account products as hedge funds or private equity funds, officials say.
“One approach may be for Agencies to design, by rule, a process by which insurance companies can request an interpretative determination of whether particular separate accounts and products qualify under the definition of hedge or private equity fund,” officials say.
THE MISSING FSOC MEMBER
The Property Casualty Insurers Association of America (PCI), Des Plaines, Ill., has pointed out that the Obama administration has not yet nominated the statutorily required FSOC insurance voting member.
The Dodd-Frank Act requires the insurance voting member to be
“an independent member appointed by the president, by and with the advice and consent of the Senate, having insurance expertise.”
The panel is also supposed to have two other insurance officials as non-voting members. The National Association of Insurance Commissioners, Kansas City, Mo., has appointed John Huff, Missouri commissioner, to be its non-voting representative on the council.
The Treasury Department has not yet hired the other non-voting FSOC insurance member — the director of the new Federal Insurance Office (FIO).
Insurance industry officials believe that the top candidate for the voting insurance member seat is S. Roy Woodall, a former Kentucky insurance commissioner who is now a Treasury Department consultant.
Woodall, a Republican, has been president of the National Association of Life Companies. He also worked on state issues at the American Council of Life Insurers, Washington, and later was an assistant secretary of the Treasury for financial institutions during the Bush administration.
But highly-placed industry sources say Neal Wolin, a deputy Treasury secretary who was a top executive at Hartford Financial Services Group Inc., Hartford (NYSE:HIG), has indicated that the Obama administration is apparently “not far along” in determining who should be nominated for the insurance voting member slot.
“While we do not want to see the important work of the FSCOC delayed, we also don’t want critically important decisions affecting the insurance industry made without the appropriate and legally required participation of insurance experts,” PCI President David Sampson says.The Financial Stability Oversight Council (FSOC) has come out with the indicators it plans to use to decide whether a large insurer is shaky enough to need the attention of the Federal Reserve Board.