Fed calls for data in quantitative impact study on ‘its’ insurers

Washington, Sept. 30 —

It’s here. The Federal Reserve Board today invited insurers to participate in a voluntary data collection for a quantitative impact study (QIS) to analyze the impact of various aspects of the regulatory capital framework.
The study will be designed to help the Fed to possibly tailor its capital requirements for its supervised institutions, which include savings and loans substantially engaged in insurance underwriting activities, and Dodd Frank’s nonbank/insurance systemically important financial institutions (SIFIs.)
Section 171 of the Dodd-Frank Act requires, in part, that the Board establish consolidated minimum risk-based and leverage requirements for depository institution holding companies and nonbank financial companies supervised by the Board that are not less than the generally applicable risk-based capital and leverage requirements that apply to insured depository institutions.
The QIS is more than a glimmer of hope for insurers who were concerned about draconian, ill-placed capital standards that did not befit their capital structure mixed with inflexibility in rule interpretation with regard to long-tail liabilities and premium collection.
The Fed says the QIS is being conducted to allow the Board to better understand how to design a capital framework for insurance holding companies that is compliant with Section 171, the so-called (Maine GOP Sen. Susan) Collins Amendment.

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

The study’s results could help tailor capital requirements for insurers even without the pending Congressional legislation, as the Fed follows for a two-track system.
Under the track where there is no legislative fix for the Collins Amendment, the Fed would “still be able to do some things because there are insurance products…that do not resemble existing bank products. And so in some cases, we can and we’re already planning to assign different risk weights to those based upon our assessment of the actual risk associated with — with those assets,” in the words of Fed Board Gov. Mark Tarullo before a Senate Banking Committee earlier this month.
By getting more information from the insurance companies, Tarullo said then, “We hope to actually find a few other areas where consistent with existing statutory requirements, we could still make some adjustments.”
He said it “all come down to core insurance activities and the different kind of liability risks that are associated with them, noting the assets are often the same but that it is on the liability side of the balance sheet where an insurer capital structure is unique and deserves a different treatment, perhaps.
Tarullo said that the Fed would “like to be able to take (the liability difference between insurers and banks) into account” during his testimony.
Information provided via the QIS should be as of year-end 2013, unless noted otherwise for purposes of reporting specific line items. Note that the Federal Reserve may follow-up with participating firms to better understand the information provided in the final submission package.
The QIS template and QIS instructions were developed exclusively for the purposes of this data collection exercise. The QIS data collection and subsequent analysis of that data are not to be construed as an official interpretation of other documents published by the Federal Reserve System or as representing any final decisions regarding implementation of a regulatory capital framework or reporting requirements for the firms in scope. Data and responses provided via the QIS will be used and maintained in a manner that  the Fed says is designed to preserve firm anonymity and confidentiality of the voluntarily-submitted data.

The reporting template is detailed with many subcategories that add up to toal capital, including amounts such as  capital requirements for underwriting risks, including international subsidiaries and total investments in the Tier 2 capital instrument of other financial institutions that the holding company holds reciprocally, where such reciprocal crossholdings result from a formal or informal arrangement to swap, exchange, or otherwise intend to hold.

Exposures and debt obligations, performance standby letters of credit and transaction-related contingent items are also to be detailed in the line by line data call.

The Fed seems open to collecting any and all information the insurer can produce, in a form that can reflect statutory or national accounting standards.

The QIS template is divided into four parts: Part I: Regulatory Capital Components and Ratios; Part II: Risk-weighted Assets; Part III: Separate Account Data; and  Part IV: State-based or Foreign Equivalent Risk-Based Capital (RBC) Requirements.

Parts I and II are based on Federal Reserve’s regulatory capital schedule for holding companies modified as appropriate for the QIS, and ask for consolidated data under Generally Accepted Accounting Principles (GAAP). T

The QIS instructions for Parts I and II also include guidance on reporting insurance-specific assets, as well as general guidance on expectations for estimating GAAP numbers for companies that produce financial statements based only upon Statutory Accounting Principles (SAP).

Firms that produce financial statements based upon SAP only are requested to include narrative responses to certain questions to provide the Federal Reserve with a better understanding of the assumptions used to estimate amounts under GAAP, as well as a breakdown of certain regulatory capital components and insurance-specific assets.

FIO wants national approach in key areas, is watchful in others

Washington-Sept. 24, 2014
In the U.S. Department of the Treasury’s Federal Insurance Office (FIO) newly-released second Annual Report on the Insurance Industry, there are a few glimpses into further action FIO might be considering beyond its standard “monitor and report on” response to state-by state variations and issues of concern.
For example, the FIO is concerned with consumers’ retirement needs in the form of insurance products like life insurance and annuities and the availability of products and access to them in a safe manner.
In light of the decrease in life insurance agents and policies sold to individuals while needs remains high, FIO is looking into ways to promote access to what it deems “essential insurance products.”
The report discusses going beyond efforts in addition to the already preemptive pending legislation known as the National Association of Registered Agents and Brokers Reform Act of 2013 (NARAB II.)
Additionally, the report also says that questions concerning reinsurance collateral should be uniformly addressed on the national level.
FIO has been monitoring measures state-by-state to reform the requirements relating to collateral for reinsurance for almost three couple years now (the NAIC model law passed November 2011) but has found that in the 23 states that have adopted some measures of reform, authorization to accept less than 100% collateral has not been uniform in structure or implementation.
Thus, FIO suggests in its report, it is time for it to step in perhaps or at least make sure the issue is tackled at the national level.
FIO also voices its continued concern with the use of captive reinsurance as a source of risk in the life sector. The report acknowledges state regulatory attempts to address the issue but follows up with continuing concern from various sectors. However, FIO is still at the “monitor and report” stage here.
Also, the approach to ensuring availability and affordability of personal auto insurance remains open, as FIO is till monitoring the issue after receiving requested comments this spring and summer from stakeholders on how to define affordable personal auto insurance, including possible metrics.
The FIO is also appears to be getting involved with the Death Master File data to help make sure beneficiaries receive death benefit payments on policies. FIO said in the report is working to support stakeholder efforts to identify suitable alternative data sources, while working with stakeholders (including the National Technical Information Service, which supervises public access to the DMF) to support appropriate access to the DMF.

The report is largely positive on market performance. It stated that bottom-line numbers in the insurance marketplace in 2013 were encouraging and that at U.S. insurers have continued to show resilience in the aftermath of the financial crisis. Gains in net income drove reported surplus of both the P/C and L/H sectors to record levels.
At year-end 2013, the L/H sector reported approximately $335 billion in capital and surplus, and the P/C sector reported approximately $665 billion in capital and surplus, although net written premiums for the L/H sector were down slightly, from records set in 2012.
FIO has pointed out before, and does so here again, that while the United States remains the world’s largest insurance market by premium volume, its share has declined both as a percentage of domestic GDP and as a percentage of worldwide market share. Emerging economies have seen dramatic increases in premium volume, the report graphs.
This segues into updates on international supervisory activities and progress, the Federal Reserve supervision of insurers and matters examined in the watershed FIO Modernization report, released last December.
FIO’s support of international prudential standard-setting activities spearheaded through the International Association of Insurance Supervisors (IAIS), and implementation of such standards by the “appropriate national authorities” is clear in the new report, which sites financial stability, enhanced understanding and consistency as guiding principles in global insurance supervisory efforts.
FIO, which was established within Treasury as part of the Dodd-Frank Act, has a statutory duty to monitor all aspects of the insurance sector, including identifying issues that could contribute to systemic risk in the insurance industry or the U.S. financial system, which is where captive reinsurance concerns could play out. FIO also is supposed to assess the availability and affordability of insurance to traditionally underserved populations, advise the Secretary of the Treasury on major domestic insurance policy issues, and represent the United States on prudential aspects of international insurance matters, a role which FIO Director Michael McRaith has, by all accounts, heartily undertaken.

‘Team’ USA trying to fashion own capital standard for global stage

The development of group capital standards or the global insurance capital standard (ICS) has reached U.S. shores and the sector is working together–or listening together–to develop possible approaches.
To that end, U.S. regulators and stewards of domestic insurance policy met with the insurance industry Friday to discuss possible approaches to a U.S.specific group capital framework that would satisfy the International Association of Insurance Supervisors (IAIS).
The National Association of Insurance Commissioners (NAIC) hosted its ComFrame Development and Analysis Working Group in Washington with members of the insurance industry, and representatives from the U.S. Treasury Department’s Federal Insurance Office (FIO) and the Federal Reserve Board to discuss a U.S. group capital proposal that respects jurisdictional accounting requirements and perhaps also incorporates the U.S. risk based capital (RBC) approach.
Many in the U.S. favor jurisdictional-based approach rather than a standard imposed globally, leading to proposed solutions for crafting a domestic capital standard that would be okay’ed by global supervisory forums .
Any standard would be adopted by the Fed for its stable of insurers–thrifts and systemically important insurers–and the states, via the NAIC for all other insurance groups.
The Fed and Treasury are influential members of the G-20’s Financial Stability Board (FSB) and have a great role in capital standard development for financial institutions worldwide.
The meeting was led by Florida Insurance Commissioner Kevin McCarty, past NAIC president, Pennsylvania Commissioner Michael Consedine, head of the NAIC’s International Insurance Relations (G) Committee and NAIC president-elect, Tennessee Commissioner Julie Mix McPeak and New Jersey Commissioner Ken Kobylowski.
The NAIC staunchly adheres to a position that any capital objective be the protection of policyholders.

Staircase at National Fire Group, Hartford, Dec. 10, 1941, courtesy Library of Congress archives via Gottscho-Schleisner, Inc.,  photographer

Staircase at National Fire Group, Hartford Stair, Dec. 10, 1941, courtesy Library of Congress archives via Gottscho-Schleisner, Inc., photographer

Various companies suggested as possible approaches and alternatives as “work to date on these standards has revealed numerous issues and difficulties calibrating a global capital standard for such a diverse industry,” as Liberty Mutual wrote in a presentation submitted to the NAIC.
Suggested capital development approaches, based on materials submitted to the NAIC, include use of an insurance group’s own capital mode, more use of supervisory colleges, developing a group RBC formula which considers banking and non-insurance entities operating within the group (CNA), valuing cash flows, calibration with potential disaster scenarios and risks, replacing insurance reserves with best estimate liabilities to remove the major source of inconsistency across companies and regimes (Prudential Financial) while maintaining consistency between he valuation of assets and liabilities (a life insurance sector approach), and mutual recognition of local solvency regimes for international groups (Aegon/Transamerica) and use of U.S. statutory reporting measurement framework as a way to assess capital adequacy (Allstate.)
“It is more important to focus on the total asset requirement than the level of required reserves or capital on a separate basis. The focus should be on holding adequate total assets to meet obligations as they come due,” stated the American Academy of Actuaries.
New York Life put forth that “the new standards should require insurers to stress test cash flows under a set of prescribed stress scenarios. We believe that a cash flow stress testing approach offers the best way to ensure solvency and financial stability in a globally comparable manner, while preserving appropriate incentives for U.S. life insurers to continue offering sound, long-duration products that provide security to consumers.”
Or, as one person summarized. “Don’t come up with a dollar amount, come up with a probability that your cash inflows over time will exceed cash outflows…”
Non-life, property casualty companies were not so interested in matching long-term liabilities or cash flow testing because they are invested in short and medium-term municipal bonds of about seven years in duration, which need to be rolled out several times over the course of 30 years. The 30 year-notes are not as attractive anymore among low interest rate environment.
Most tossed out any mark to market accounting approach for valuations. Representatives discussed the need for a level playing field between large and small companies, the compliance costs involved for all companies in meeting these or any standards and the need for more meetings, including and in-person meeting before November.
The NAIC wants to have a recommendation for discussion and action at its Nov. 16-19 national meeting in Washington.
Some of the ideas advancing from the Sept. 19th meeting include the sentiment that domestic coordination is important if ideas are to advance internationally with a broad desire ti have all US voices say the same thing, and that p/c and life insurance need different standards, according to Dave Snyder of the Property Casualty Insurance Association Of America (PCI).
Other points include a skepticism about comparability between countries, a standard that recognizes the US model as one of the standards for compliance and an appreciation, he said, for NAIC’s transparent process.
However, Snyder said, there is “no guarantee at this point that the IAIS will accept an RBC-based system as one option for compliance…However, there are regulators outside the US that might share similar views and their systems ought to be recognized as being compliant with an ICS.”
The IAIS May 2014 ICS Conceptual Memorandum introduced jurisdictional group capital methods (the oft-cited paragraph 30) that could be accepted instead of the ICS as-is.
Although there is general NAIC and industry acceptance, if not enthusiasm here, that there will be an ICS of some sort, a byproduct–or product–of the IAIS ComFrame project which has been re-imagined by the FSB since ComFrame’s 2010 inception, not many in the U.S. are true believers.
“It is interesting to note that the effort to converge insurer accounting standards has failed after a ten year effort. Many times during the last decade it was asserted that the ‘train has left the station,’ regarding that effort. Apparently, U.S. accounting standard setters discovered “reverse” gear,” stated Marty Carus, former AIG compliance executive and a former long-time New York insurance regulator.

NAIC changing of the guard at FSOC: Hamm in, Huff out

Sept. 18, 2014 — Adam Hamm, president of the National Association of Insurance Commissioners (NAIC) and North Dakota insurance commissioner since 2007, has been appointed to a two-year term as the state insurance commissioner representative on the Financial Stability Oversight Council (FSOC).
As a state insurance commissioner, Hamm is one of five non-voting members on the FSOC, which is composed of 10 voting members led by the Treasury secretary.
Hamm, a Republican, replaces Missouri Insurance Director John Huff, a Democrat, on the FSOC at a critical time for insurance stability oversight. Huff had served his two terms.

NAIC President Adam Hamm, courtesy NAIC website

NAIC President and ND Commissioner Adam Hamm, courtesy NAIC


FSOC is awaiting a response from MetLife on whether it will accept or appeal its proposed designation as a systemically important financial institution (SIFI.) FSOC proposed the designation Sept. 4 without disclosing the name of the company.
FSOC is also reviewing what appears to be another insurer or reinsurer, now in the Stage 2 process of SIFIhood. Stage 3 is the final analysis before the books are closed on a company.)
There is also partisan legislation pending in Congress seeking to forestall more proposed designations for a period of time, and to force the FSOC to be more forthcoming with information as well as to allow in to its closed meetings certain members of Congress.
Huff marked his tenure at FSOC publicly with his dissent in the FSOC’s designation of Prudential Financial as a SIFI and an open statement at an NAIC meeting that members of FSOC did not understand insurance.
Huff and the NAIC have been critical of FSOC In the past but it is unknown how Hamm will play the cards given to him as a non-voting member of the Council.
The NAIC in 2011 wrote to then-Treasury Secretary Tim Geithner that Huff was being stymied by the FSOC and Treasury in his attempts to tap the NAIC and the state insurance departments for additional staff support and that Huff had been prohibited from discussing or seeking guidance from relevant state regulators even on a confidential basis. The NAIC also complained that FSOC was limiting Huff’s role on the FSOC. See: http://www.naic.org/documents/testimony_letter_110209_fsoc_geithner.pdf

Huff argued a year ago this month that the basis for the Prudential decision lacked evidence, analysis and was speculative, and based on unlikely events. He said what the FSOC did do was merely show that Prudential was a large and complex institution, but that was all it showed. See: http://www.naic.org/documents/index_fsoc_130920_huff_dissent_prudential.pdf
Huff also criticized some of the statements and arguments in the majority or “basis” opinion as suggesting “a lack of appreciation of the operation of the state-based regulatory framework, particularly its resolution processes”
For instance, he demonstrated alarm that the FSOC majority reasoned that the authority of an insurance regulator to ring-fence the insurance legal entity could complicate resolution and could pose a threat to financial stability.
Huff argued that Ring-fencing is a powerful regulatory tool utilized by insurance regulators to protect policyholders and prevents the transfer of assets without regulatory approval.
It has been a great honor to serve on behalf of my fellow state insurance regulators on FSOC,” said Huff in a statement today. 
Hamm stated that he will assume his new role “with great respect for the work of Director Huff and I look forward to working with the other financial regulators as we take the next steps to promote a stable insurance marketplace and protect the broader financial sector.”

The FSOC was created by the Dodd-Frank Act in 2010 to monitor the safety and stability of the nation’s financial system, identify risks to the system, and coordinate a response to any threats.
Companies designated as SIFIs are subject to oversight on a consolidated basis by the Federal Reserve Board. For example, Prudential Financial is being regulated as an entity by the Boston Fed, although accompanying capital rules have yet to be developed and imposed. Home state regulator New Jersey still oversees the various insurance components and market conduct elements of Prudential, but must confer with the Fed.
Huff was appointed to FSOC in August 2010 by NAIC. His term began Sept, 15, 2010 and he was reappointed in 2012 for a second term which expired on Sept. 15, 2014.

Thank you,

House capital standards ‘fix’ won’t fly with weighted feathers, some complain

UPDATE: Bill PASSES the House on Tuesday evening with three measures attached–collateralized loan obligation rules, mortgage transaction fees, points definitions and business risk mitigation and price stabilization requirements. More coverage in future post.
Washington, Sept. 16–
The insurance industry is bracing for possible action tonight from the U.S. House on the Dodd-Frank Act’s Collins Amendment fix or HR 5461, the “Insurance Capital Standards Clarification Act of 2014,” after fits and starts, centered on what Congresswoman Maxine Waters, D-CA, Ranking Member of the Financial Services Committee (FSC) called”three divisive measures that make substantive changes” to the 2010 law.
The measure is based on legislation introduced by Rep. Gary Miller, R-CA., and Rep. Carolyn McCarthy D-N.Y., and sponsored also by sponsored by Rep. Andy Barr, R-Ky., and would clarify the Fed’s authority under the Dodd-Frank Act’s Collins Amendment.
Another person close to the insurance industry called it a game of cat and mouse, with the House leadership adding new provisions despite hearing from the Senate the bill would be a no-go there and on the President’s desk, as well. Another merely called it “messy,” with added provisions on requirements regarding mortgage transaction fees and collateralized loan obligations.
The unadulteratedfe9f3d5e-3084-4b0a-8afa-3b41Maxine Waters JPEG879a573d “fix” provision is largely backed by the entire insurance sector involved and most of Congress who has weighed in, and the chairman of the FSC, Rep. Jeb Hensarling, R-Texas, has promised the industry a clean bill during the lame duck period after the elections, according to a source.
The legislative solution to the tightly wrought Section 171 of the Act would allow the Federal Reserve Board flexibility in applying the required minimum capital standards on its regulated entities engaged predominantly in insurance.
Otherwise, the Fed has said it basically has no choice but to require the capital standards whether for insurers or banks, even though it has acknowledged in various arenas that insurance capital is not measured the same way or for the same purposes as bank capital.
Over in the Senate, a bipartisan bill has passed, and Fed Gov. Daniel K. Tarullo has said clarifying legislation would be welcome.
“We can and should make common-sense changes to lessen the regulatory burden,” Tarullo stated at a hearing last week in the Senate. Regarding giving the Fed flexibility to tailor the capital standards it places on insurance companies, the Senate passed, by unanimous consent, a fix so that insurance companies are not subject to bank-like capital requirements contrary to their business mode, he pointed out.
Tarullo testified that it “would be very welcome if the House would follow” the Senate’s lead and enact the legislation, to give the Fed the kind of flexibility in making an assessment on the liability vulnerabilities of insurance companies that are unique to insurance companies.
Meanwhile the Fed is going to conduct a quantitative impact study to try to develop some more information on insurance industry specific products, and look at what it calls the liability vulnerabilities of insurers.
Back in the House, Waters complained that the House is “circumventing and politicizing” the process so that the fix, if packaged with other measures, will go nowhere in the Senate.
“Make no mistake – but for the Chairman’s intransigence, the insurance capital fix bill could be on the President’s desk for signature tomorrow,” Waters stated.
What the ed does determine on capital adequacy for insurers under its purview–systemically important institutions and insurers with savings & loans- is still unknown, but some analysts think it could mirror what the standard is globally as the G-20’s Financial Stability Board adopts the proposed capital requirements for global systemically important insurers (G-SIIs) from the International Association of Insurance Supervisors (IAIS).
This is a good indication of what future capital standards from the Federal Reserve will look like for domestic SIFI insurers, says a note from Washington Analysis.
“While it is likely to be modified by U.S.regulators, we view the IAIS proposal as manageable for the group, as it is tailored to insurance and similar in many ways to existing Risk Based Capital (RBC) requirements. We do not expect the Fed to propose domestic capital requirements until Q1 2015, at the earliest, with final rules unlikely until at least mid-2015,” Washington Analysis said in a note to its clients and others.
In the meantime, eyes are also on Tarullo’s fixation with insurance liabilities and how the Fed will weigh them as it develops capital standards for its stable of insurers, which include Prudential Financial, AIG and TIAA-Cref.
Under one alternative, the Fed “would be able to take account of the different liability structure of core insurance kind of activities and that would allow us to shape capital requirements at the consolidated holding company level in a way that fully took account of those differences in business model, Tarullo said in his Sept. 9 Senate testimony before the Banking, Housing and Urban Committee.

*Photo of maxine Waters courtesy of http://waters.house.gov/

Fed conducting ‘quantitative impact study’ on insurance products as it weighs capital standards

The Federal Reserve Board is undertaking a quantitative impact study to develop information on insurance industry specific products, said Fed Gov. Daniel K. Tarullo in Senate testimony today.

But Tarullo also it would be “very welcome” if the House would follow the lead that the Senate did in enact legislation that basically allows the Fed flexibility in taking into account the distinctions between banking and insurance when setting capital standards as does the Senate bill, Capital Standards Clarification Act of 2014.

Such legislation would allow the Fed to make an assessment on the liability vulnerabilities of insurance companies – that are unique to insurance companies, Tarullo said.

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

View from then-new Federal Reserve building, May 1937, courtesy LOC archives

The Fed, of course, is the prudential regulator of systemically important financial institutions (SIFIs), like Prudential Financial and AIG, and also oversees the insurance companies that still have savings and loans or thrifts.

Section 171 of the Dodd Frank Act requires the Fed to impose minimum capital standards on insurance holding companies on a consolidated basis and really gives no room, according to an opinion from the Fed general counsel, at least, for the capital rules to be narrowly tailored to insurers, who plan their businesses so assets match liabilities, not so that they have capital cushions, per se. However, he seemed to indicate it would be possible in testimony today.
“In the absence of the legislation, we’ll still be able to — to do some things because there are insurance products of — that — that do not resemble existing bank products,” Tarullo stated. “And so in some cases, we can and we’re already planning to assign different risk weights to those based upon our assessment of the actual risk associated with — with those assets.”
But — but that’s — that’s where the — the two-tracking is actually taking place.
I mentioned a little back the quantitative impact study that we’re doing, by getting more information, I think, from the insurance companies, we hope to actually find a few other areas where consistent with existing statutory requirements, we could still make some adjustments,” he explained to Sen. Mike Johanns,R-Neb., based on an unofficial transcript.

Tarullo said the Fed would continue with this approach of using two tracks of planning with respect to capital rules for insurance companies.

Tarullo testified on a panel before the Senate Banking, Housing Urban Affairs Committee on a hearing titled “Wall Street Reform: Assessing and Enhancing the Financial Regulatory System.”

His questions were in response to questions starting with Committee Chair Tim Johnson, D-South Dakota if it were important for Congress to act soon on capital standards.
The Fed did not have a comment on Tarullo’s remarks.

Tarullo let lawmakers where he thought the distinction was in banking versus insurance: “The assets are often the same. It’s — it’s really on that liability side of the balance sheet that — that you feel a difference in what a property and casualty insurer does as opposed to what a bank does and that’s what we’d like to be able to take into account,” he stated.

MetLife receives preliminary SIFI designation from FSOC

Washington, Sept. 4 — After more than a year of review, the Financial Stability Oversight Council (FSOC) voted today to preliminarily designate MetLife, the country’s largest life insurer, a nonbank systemically risky financial institution or SIFI, and the insurer said it is weighing its options.
The Council’s vote was unanimous with one member voting present. AIG, when it was designated, had an unanimous vote. Prudential Financial’s final designation vote was 7-2, with an abstention from the new SEC chairwoman.
“MetLife strongly disagrees with the Financial Stability Oversight Council’s preliminary designation of MetLife as a SIFI,” stated after the vote.

“MetLife is not systemically important under the Dodd-Frank Act criteria. In fact, MetLife has served as a source of financial strength and stability during times of economic distress, including the 2008 financial crisis,”MetLife CEO Steven Kandarian continued in a prepared statement this afternoon.
The preliminary designation came in a closed meeting of the FSOC, over which U.S. Treasury Secretary Jacob Lew presides.

Construction of the US Treasury Building, 1857, image courtesy LOC

Construction of the Treasury Building, 1857, courtesy LOC


Kandarian said that MetLife is not ruling out any of the available remedies under Dodd-Frank to contest a SIFI designation.

Prudential Financial appealed the decision last year by the FSOC and lost but did not pursue the matter through the court system.

MetLife now has 30 days to request a hearing before the Council to contest the proposed determination. After any hearing, the Council may make a final determination regarding the company.

FSOC does not intend to publicly announce the name of any nonbank financial company that is under evaluation before a final determination is made.

Instead, MetLife did the talking today: “The current regulatory system oversees a stable industry that pays out more than $500 billion every year. Imposing bank-centric capital rules on life insurance companies will make it more difficult for Americans to buy products that help protect their financial futures. At a time when government social safety nets are under increasing pressure and corporate pensions are disappearing, the goal of public policy should be to preserve and encourage competitively priced financial protection for consumers,” Kandarian stated.
If assets are treated as short-term under accounting or capital rules, then insurers will not be there to buffer the risk they have taken on with huge pension plans, insurers have argued.
When and if New York-based MetLife is formally designated, it would be subject to enhanced prudential supervision from what (again) will be its primary regulatory Federal Reserve Board, with a host of accompanying  holding company oversight and capital standards, a yet to be worked out by the Fed.
The vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing and the time-frame to respond elapses.

However, the most interesting part of MetLife’s potential designation will be the rationale used by FSOC. For example, for Prudential, last year, the FSOC majority started with the premise of an impaired insurer, with a run on the bank scenario, that many in the insurance industry–and the independent insurance expert, Roy Woodall, thought was implausible, according to his dissent.
Last year, FSOC determined that Prudential’s material financial distress could pose a threat to financial stability focusing on two of the channels: exposure and asset liquidation.
“The Council has based its conclusion solely on what is referred to as the First Determination Standard; namely: ‘material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States,'” Woodall stated in his dissent.
Under Dodd Frank regulations, FSOC can, but does not require, that it begin with the company in distress and make determinations from there.
Passing that up brings the Second Determination Standard, dealing with the activities of an institution, into play.
“Given the questionable and unreasonable basis for the Council’s reliance solely on the First Determination Standard, it is my position that it would have been prudent for the Council also to have considered the Second Determination Standard pertaining to activities,” Woodall stated in the Prudential dissent of September 2013.
The fact that there were no dissents today–a ‘present’ vote is not a dissent–it appears the FSOC COULD have used the second determination route with MetLife.
Reaction from the Hill will certainly come, as some concerned lawmakers there have been attempting to stop FSOC in its tracks and have it reconsider SIFI designations until there is further disclosure on proceedings.
Rep. John K. Delaney, D-Md., a member of the House Committee on Financial Services,stated he had concerns about the process behind the MetLife designation, particularly regarding an alleged lack of communication and transparency.
“I generally support FSOC and its goals, but believe the details can be improved,” said Delaney, who, in July introduced with Rep. Dennis Ross, R-Fla., the FSOC Improvement Act (H.R. 5180) to address concerns about lack of transparency in the SIFI designation process.

MetLife, like its insurance SIFI brethren AIG and Prudential, is already designated as a global systemically important insurer (G-SII) by the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS), which is expecting to designate any global reinsurers it deems systemically risky this November.
MetLife has been regulated by the Fed before, back when it owned a bank. MetLife debanked in early 2013 in part to get out from under the Fed’s Tier One capital-focused oversight, where it was subject to stress tests it believed befit banks, not insurers.

Insurance trades were having none of what the FSOC delivered today.

The American Council of Life Insurers (ACLI) said it “is extremely disappointed” by the designation today of another life insurance company, MetLife, as a SIFI.

“No single life insurer poses a systemic risk to the U.S.economy,” it simply stated.
For its part, he Property Casualty Insurance Association of America (PCI)’s Robert Gordon, senior vice president, policy development and research, stated that “while a particular combination of facts, including the performance of non-insurance activities, may trigger a determination of systemic risk for an institution, such a determination does not alter the fact that property and casualty and other traditional insurance activities do not give rise to systemic risk.”
Rep. Scott Garrett, R-NJ), chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, who once tried to gain entry to a closed FSOC meeting, let loose on the preliminary decision: “Today’s irresponsible and inappropriate designation of another U.S. business as too-big-to-fail only strengthens my resolve to reform the out-of-control FSOC….This designation flies in the face of a unanimous, bipartisan vote in the House of Representatives to postpone any additional designations,” he said.
Garret and others have been engaged in a flurry of letter-writing over the past months to get answers from Lew and FSOC.

Lawmakers to Lew: why treat insurers differently in FSOC risk review?

Two days before the Financial Stability Oversight Council (FSOC) is due to discuss, at minimum, insurance company systemic risk designations, a group of seven Congressmen led by Rep. Scott Garrett, R-N.J., wrote to Secretary Treasury Jacob Lew with concerns that the Council is not giving insurers a fair shake.

 1839 Kollner ink and ink wash landscape of Capitol Hill,  before the dome had been added to the Capitol. Courtesy, LOC.

1839 Kollner ink and ink wash over graphite landscape of Capitol Hill, before the dome had been added to the Capitol itself. Courtesy LOC.


The treatment of the insurance industry didn’t get the public analytical effort that the asset management industry did in the FSOCs “rush” to designate firms as systemically important financial institutions (SIFIs), leading to disparate treatment of insurers, the Congressmen charged in the Sept. 2 letter.

Treasury has said before it does a very through review of the companies it reviews. metLife has been under consideration as a potential SIFI for over a year-the deliberations have not been made public nor has Treasury ever acknowledged that this company was under review.

The Council has devoted far less effort to empirical analysis, stakeholder outreach, and transparency in its consideration of insurance companies for designation than it has for asset management firms,” the Congressmen alleged.

The preliminary agenda of the Sept. 4 closed FSOC meeting includes a discussion of nonbank financial company designations as well as consideration of the Council’s fiscal year 2015 budget, and discussion of the Council’s work on asset management, according to a notice from the Treasury Department.

Joining Garrett, chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, were GOP Reps. Ed Royce, R-Calif., Sean Duffy, R-Wis., Dennis Ross, R-Fla., Spencer Bachus, R-Ala., Steve Stivers, R-OH, and Mick Mulvaney, R-SC.

They asked Lew for the rationale behind the approaches to the insurance industry in its consideration of potential SIFIs, including MetLife, which may or may not go to a Council vote tomorrow for proposed SIFI designation, depending on how ready Council members are.

The Office of Financial Research (OFR), which provides research for FSOC, published a report on the asset management industry in September 13. Although the quality of the report was roundly criticized by the Congressmen and some in the industry, they used it as a point of comparison in contrast with lack of such a report for the insurance industry. The lawmakers also noted that the FSOC held a public conference on asset management back in May but questioned why a similar exercise was conducted before designating insurers as SIFIs.

Some prominent lawmakers have been busy this year sending letters to Lew and otherwise passing legislation along party line votes through committee to attempt to gain some insight control over the FSOC process, either through efforts to make it more transparent to the public or at least certain Congressional members, or to get concrete feedback on the decision-making process for nonbank SIFIs.

Garrett himself, who introduced the Financial Stability Oversight Council (FSOC) Transparency and Accountability Act (H.R. 4387), was barred from a March 2014 FSOC meting he tried to attend.

Thus far, non bank SIFIS are AIG, GE Capital and Prudential. No asset managers have yet been named. Two insurers are under consideration, MetLife, which underwent Stage 3 analysis and has had its books formally “closed by the FSOC and another company in Stage 2, according to the minutes, which is perhaps Berkshire Hathaway, as a reinsurer, but which could be another big life insurance company, as well.

If  MetLife is designated, it would be subject to enhanced prudential supervision from the Federal Reserve Board, with a host of accompanying  holding company oversight and capital standards, a yet to be worked out by the Fed. A vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing until the time-frame to respond elapses.