US Treasury Rejects Bank-Like Rules for Insurers, Questions SIFI Label
October 31, 2017 by Frank Klimko
WASHINGTON – The U.S. Treasury rejected using federal regulations to impose bank-like supervision on insurance companies and questioned whether designating large individual carriers as systemically important financial institutions was an appropriate way of protecting the nation’s economy.
The report was in response to an executive order signed by President Donald Trump in February to do a broad review of the post-crisis regulations. Since the order, Mnuchin has placed a moratorium on the designation of any new SIFIs by the Financial Stability Oversight Council (Best’s News Service, April 21, 2017).
The report recommended the FSOC turn away from singling out individual carriers for SIFI designation and instead look for industry activities that pose a systemic risk.
“Rather than focus on entity-based systemic risk evaluations, insurance regulators should focus on potential risks arising from insurance products and activities, and on implementing regulations that strengthen the insurance industry as a whole,” the report said. “Entity-based systemic risk evaluations of insurance companies generally are not the best approach.”
Carriers were cheered by the report.
“The report provides a clear path forward with its endorsement of an activities-based approach that relies on the expertise of primary regulators,” MetLife Inc., said in a statement.
MetLife shed the SIFI designation last year via litigation and the FSOC de-designated American International Group Inc., last month, leaving only Prudential Financial Inc. so designated (Best’s News Service, Oct. 1, 2017).
“The report also notes that in the U.S., the states are the primary insurance regulator,” the company said.
In what is seen as a win for state regulators, the report conceded the federal government should not be in the driver’s seat for insurance supervision.
“The states are the primary regulators of the insurance industry in the United States and insurance regulation at the federal level should be conducted in coordination with the states,” the report said.
American Insurance Association acting Chief Executive Officer and General Counsel Stef Zielezienski said the report was a good sign.
“We appreciate the department’s efforts to use this report to lay a solid foundation for increased reform and engagement on many key public policy issues,” Zielezienski said. “Specifically, AIA was pleased to see the report reflect a number of public policy priorities that we have pressed over the last several months.”
For example, Zielezienski noted the report suggested reforming the role of the Federal Insurance Office and focusing it on international matters. The FIO, which still does not have a new director with the departure earlier this year of Michael McRaith, was heavily criticized by the industry for evaluating domestic insurance practices. The FIO will continue to internationally promote the U.S. state-based system of insurance regulation and develop a better relationship with state insurance commissioners, the report said.
“Where appropriate, as in international negotiations, the federal government should work with state regulators to promote U.S. regulation and ensure U.S. companies receive fair treatment globally,” Jimi Grande, senior vice president, National Association of Mutual Insurance Companies, said in a statement.
“NAMIC has long argued that the federal role in insurance should be limited and respectful of the state-based regulatory structure.”
Robert Gordon, Property Casualty Insurers Association of America senior vice president of policy, research, and international, agreed.
“The report identifies reforms to the Federal Insurance Office, including that the office should be an advocate for the U.S. insurance industry in international forums and negotiations,” Gordon said in a statement.
The report suggested the Board of Governors of the Federal Reserve System improve collaboration with state insurance regulators over minimum capital requirements imposed on carriers. At the state level, insurance regulators impose minimum capital requirements on a legal entity basis but have not yet developed a capital assessment for insurance groups. The National Association of Insurance Commissioners is working on a U.S. group capital calculation using a risk-based capital aggregation approach.
Last year, the Federal Reserve proposed rules would establish a capital consolidated approach for insurer SIFIs and a building block approach for carriers supervised by the Fed by virtue of their ownership of a depository institution. The report suggested the capital efforts be harmonized and the Fed rethink how it regulates insurers for which it is the consolidated supervisor.
The report recommended federal agencies adopt uniform state data security standards and breach notification requirements based off the NAIC Insurance Data Security Model Law. The report also applauded efforts to delay the implementation of the fiduciary rule for retirement products.
“Broadly speaking, the report is positive for investors in asset managers and insurers,” Ian Katz, director of Capital Alpha Partners said in a research note. “If Treasury’s recommendations are implemented, many companies will be able to reduce some regulation-related costs and enjoy a bit more flexibility in the marketplace.”
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)