MetLife will have it’s hearing on whether it is systemically risky before the Financial Stability Oversight Council (FSOC) Monday, Nov. 3, according to the New York-based behemoth.
The questions that remain aren’t whether the arguments MetLife make will sway the 10-voting-member Council, which voted on the proposed designation as a systemically risky financial institution (SIFI), with nine in favor and none opposed, with appointed Independent Insurance Expert Roy Woodall voting “present.”
The questions are what the ‘basis’ is for MetLife’s expected designation–which only FSOC nad MetLife know at thei time–and whether MetLife will take the matter to the court system after an appeal to FSOC is likely lost.
When Prudential Financial was designed a SIFI, the basis began with the company in distress and runs on the bank envisaged, Woodall dissented on that argument and on the vote, and pointed to an alternative basis of risky activities as a better approach. Since Woodall did not dissent but merely did not vote in MetLife’s proposed designation, the run-on-the-bank scenario may have been ditched in favor of another “basis.”
In a footnote in his Prudential Financial dissent, Woodall noted: “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.” The Council did not consider Prudential under the “Second Determination Standard,” which relates to specific activities of the company….”
Woodall summarized that FSOC had identified three transmission channels as avenues by which a nonbank financial company could transmit risk of instability to the financial system: (1) exposure; (2) asset liquidation; and (3) critical function or service. The Council then determined that Prudential’s material financial distress could pose a threat to financial stability focusing on two of the channels: exposure and asset liquidation, Woodall pointed out in his dissent last year.
Recently resigned FSOC member John Huff, the Missouri director of insurance, now replaced after two terms with Adam Hamm of North Dakota as a state insurance regulator, expressed several areas of concern with the FSOC’s still not-public basis of MetLife’s proposed designation, according to the FSOC minutes of the Sept. 4 meeting.
Huff also opposed the Prudential SIFI designation, and wrote a dissent, but he was, as are all state regulators, non-voting members of FSOC.
Treasury-led FSOC has 60 days from Nov. 3rd to make a final decision, although it could decide earlier — i.e.–before the end of the year.
FSOC’s website press release just calls the event a closed meeting to discuss a nonbank SIFI designations (plural, as another nonbank, perhaps a reinsurer, is in Stage 2 of analysis or therabouts) and a discussion of recent market activity.)
MetLife is already designated by the global financial supervisory authorities as a global systemically important insurer (G-SII.) The company has operations in Latin America, Asia, the EMEA countries.
MetLife reported second quarter 2014 operating earnings of $1.6 billion, unchanged from the second quarter of 2013. On a per share basis, operating earnings were $1.39, down 3% over the prior year quarter. Operating earnings in the Americas grew 5%. Operating earnings in Asia decreased 3% on a reported basis and in Europe, the Middle East and Africa (EMEA) increased 37%.
Month: October 2014
NAIC decries the member vote to end IAIS ‘observer’ status
Oct. 27, 2014, Washington — The National Association of Insurance Commissioners (NAIC) expressed strong opposition to the International Association of Insurance Supervisors (IAIS) vote to end observer membership status for non-members. The vote, which took place in closed session at the annual general meeting on Oct. 25 in Amsterdam, amended IAIS bylaws to end this observer status, which included participation in some IAIS meetings.
The IAIS is creating new stakeholder consultation procedures which have not at all been embraced by the once and former observers.
Ahthough the vote occurred in a closed session, the NAIC delegation voted against the measure, while the Federal Insurance Office (FIO) voted for it and the Federal Reserve Board representative allegedly left the room.
After attempts to work together, the schism on international supervisory issues among U.S. representatives is still defined by issues such as this.
“I am extremely disappointed in the outcome of Saturday’s vote to end observer status at the IAIS,” said Adam Hamm, NAIC President and North Dakota insurance commissioner and IAIS member. “Observers run the range of consumer advocates, insurance experts, and industry representatives – all of whom have critical input to share on the real-world consequences of decisions made by regulators. Shutting them out of the official process in favor of ‘invite only’ participation deprives IAIS members and stakeholders alike and could diminish the credibility of decisions made at the IAIS,” said Hamm, who also sits on the US Financial Stability Oversight Council (FSOC.)
ALthough the FSOC role does not assure one of membership, the fact that the NAIC members are state regulators does.
Observers, from insurance groups and lobbyists to consumer advocates to the insurance expert on the FSOC have previously spoken out against the change, criticizing the long-anticipated move for lack of access and lack of time to effect any important and long supervisory process of crafting rules — rules that would be eventually applied to insurance companies, and effect regulations, markets and consumers.
“Relegating systemic risk policymakers to only those opportunities afforded to the general public would reduce the likelihood of effective attainment of the IAIS goal of providing a meaningful contribution towards global financial stability,” FSOC Independent Insurance Expert Woodall stated in a comment letter to the IAIS in early September.
Said consumer advocate Peter Kochenburger, executive director of the Law School’s Insurance Law Center,”I would say that the IAIS annual conference in Amsterdam further confirmed the value of stakeholder participation: (1) without any consumer (policyholder) participation the dialogue is either regulators talking only to themselves, or to the industry, with the crucial second party to any insurance transaction, the policyholder, not having a voice (2) as the industry points out, they will be responsible for ultimately following and implementing changes in national (or state) insurance laws and have a knowledge base and stake in participating in its making.”
The new consultation procedures being developed will likely outline how certain stakeholders may participate in portions of some meetings by invitation only as well as the creation of open hearings with stakeholders separate from IAIS meetings.
The Center for Economic Justice (CEJ), run by IAIS observer consumer advocate Birny Birnbaum, said also in a comment letter Sept. 2, the IAIS new, proposed policy for consultation of stakeholders is not a good solution because it “will not ensure all relevant stakeholders are properly consulted because there is no formal consumer participation program or assistance, because the implementation is left to the discretion of the Chair and because there is no formal training for members or committee leadership in implementing public participation policies and procedures.”
Besides being “clearly not transparent,” the proposed ‘standardized framework’ is too short on the required interactions and too long on the options to ensure consistent stakeholder interaction across committees and projects,” Birnbaum wrote.
The IAIS is in part funded by Observer fees and some anticipate that the G-20’s Financial Stability Board (FSB), which is directing many of the IAIS work on international capital standards, may pay the funds now.
“Over the years, the IAIS has benefitted from the input and ideas provided by our observers which not only result in quality end products, but also provide our stakeholders with a better understanding of our work and our development processes,” said Kevin McCarty, Florida insurance commissioner and past NAIC president, who has served in IAIS roles for some years and who serves on the IAIS Executive Committee.
“…we are concerned about changes which will result in less transparency and openness by closing all meetings to stakeholders going forward,” he continued, contrasting the NAIC’s policy of transparency with the IAIS’ plan.
U.S. state regulators are not alone in their concern with the new process. Congress has introduced a bipartisan resolution calling for openness and transparency by the IAIS, the NAIC pointed out in a release.
Dave Snyder of the Property Casualty Insurance Association (PCI), who recently returned from Amsterdam, remarked that”the NAIC vote upholds the views of our federal and state lawmakers and our traditions of openness to all interested parties. On the other hand, the IAIS action is a serious mistake as it will make it more difficult to meaningfully consider the views of all stakeholders. It will also potentially result in flawed standards and guidance that will run into preventable opposition and thereby fail to be implemented.”
IAIS develops BCR; U.S. weighs whether they are evolutionary or revolutionary
The International Association of Insurance Supervisors (IAIS) completed its first step in process to develop group-wide global insurance capital standards during its conference in Amsterdam. This week it announced that it had concluded development of the first-ever global insurance capital standard – Basic Capital Requirements (BCR) for global systemically important insurers (G-SIIs).
The BCR has also been endorsed by the G-20’s own Financial Stability Board (FSB).
“With design of the BCR now complete the IAIS has concluded the first of several steps in its process to develop group-wide global insurance capital standards,” said Peter Braumüller, chair of the IAIS Executive Committee, which also includes Federal Insurance Office (FIO) Director Michael McRaith, a Treasury official, and two U.S. state regulators.
Treasury and the Federal reserve Board as well as the Securities and Exchange Commission sit on the international FSB.
This comes as expected–now it is up to the countries to absorb it or otherwise fit it into their regulatory methodologies.
In the U.S., that means the primary regulator, whether the states or the Fed, depending on whether the insurer owns a thrift/savings & loan has been deemed a systemically important financial institution subject to enhanced prudential regulation.
The adoption in whole or part should be interesting as not all U.S. attendees appear to be on the same page, although some would wish it so.
McRaith, according to those live-tweeting the event at #iais2014 (let’s be clear; this blogger could not attend and turned to social media and attendee feedback) apparently said on a panel on capital standards that there was “a great desire” to move forward with them as long as “no one has to change.”
McRaith also called the BCR development a significant milestone as it is the first ever group capital standard, according to Tweets from attendees. He also focused on the importance of the globalized insurance markets and also noted, according to Tweets, that he was not worried about a monoculture developing with this capital standard.
The IAIS is developing no less than three separate capital standards for SIFIs: the BCR and the higher loss absorption (HLA) for G-SIIs, and the Insurance Capital Standard (ICS) for Internationally Active Insurance Groups (IAIGs.)
The BCR will serve as the comparable foundation for the HLA. Together, BCR and HLA will provide a consolidated group-wide capital requirement that will apply to G-SIIs only. When the ICS is finalized, it will replace the BCR in its role as the foundation for HLA. Got it?
The ICS is expected to be adopted in late 2018 and the HLA from 2019 onward, initially based on BCR as a foundation, moving later to ICS.
From 2019, G-SIIs will be required to hold capital no lower than the BCR plus HLA.
Missouri Insurance Director John M. Huff, in his keynote address,speaking on behalf of the NAIC, notably wavered from the perceived absolutism of a capital principle. He called upon global regulators to “acknowledge that our approaches to capital can be very different.”
Huff called upon the global community to give jurisdictions time needed to “develop standards appropriate to the insurance industry, and resist the pressure to homogenize regulation to treat all products and all investments the same.”
“In the U.S. as an example, with the exception of SIFIs, … the goal of the insurance capital requirements is not to prevent failure of a firm but to ensure the impact to policyholders is minimized. In other words, firms are allowed to fail but policyholders still need to be protected,” Huff stated.
He cautioned that if regulators require too much capital, then prices for consumers go up.
“A delicate balance needs to be achieved, and we must leverage other supervisory powers to complement capital such that we do not become over reliant on it,” Huff stated.
McRaith did acknowledge that a wide variety of views must be taken into account in development of global standards, according to a Tweet from an IAIS official.
Huff partially echoed that sentiment in his remarks: “When it comes to core principles, let’s truly make them principles where there is broad agreement they are critical to policyholder protection …true international norms that individual members can implement in a way appropriate for their home jurisdiction.”
“When it comes to the capital requirements, …we need to recognize that given the timelines, we need to work with present supervisory systems rather than thinking such standards could be used to dramatically reshape those established under existing law. As we move forward on these issues, practical and implementable change will be evolutionary, not revolutionary,” Huff stated.
Based on end-2013 data received during field testing, the average level of the BCR is 75% of the reported jurisdictional group-wide Prescribed Capital Requirement for G-SIIs, and 67% for all 2014 field testing volunteers, the IAIS stated.
Beginning in 2015, the BCR will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of refining the BCR.
The development of HLA requirements to apply to G-SIIs is due to be completed by the end of 2015. The final step is the development of a risk-based group-wide global ICS, due t by the end of 2016 and applied to IAIGs from 2019.
BCR is calculated on a consolidated group-wide basis for all financial and material non-financial activities. It is determined using a “factor-based” approach with 15 factors applying to defined segments and their specified exposure measures within the main categories of a G-SII’s activity – traditional life insurance, traditional non-life insurance, non-traditional insurance, assets and non-insurance.
All holding companies, insurance legal entities, banking legal entities and any other companies in the group will be included in the consolidation.
For more information, see PDFs on the iAIS website here.
NYU prof. sees possible life insurer failure from risky behavior– Industry & NAIC say nonsense
The C.V.Starr Professor of Economics at the New York University Stern School of Business said he sees systemic risk in the life insurance sector as companies deploy more regulatory arbitrage to reduce needed capital, push off liabilities and pursue riskier strategies that banks used to pursue.
Specifically, the professor, Viral V. Acharya, focused on recent research on captive reinsurance, which he termed off balance sheet shadow insurance, search for yields in the corporate bond market and a reduction in capital requirements for mortgage-backed securities. He said insurers seem to be filling the void left by banks who started exiting risky behavior after the crisis.
He specifically raised MetLife, especially, and Prudential Financial as life insurers that can fail if there is a housing market correction and an equity market collapse.
Speaking a part of a panel on global insurance regulation at the Brookings Institution on Oct. 14, he said he was “stunned” at the capital reduction requirements for residential (R) MBS since a 2009 reform by the NAIC reducing RMBS capital required by 67%. This capital relief for large and perhaps distressed – in 2009 insurers amounts to over $15 billion relative to the earlier risk-based system, he charged.
For his suggested failure scenario, Acharya faulted capital calculations based on expected losses.
“What about unexpected losses,?” he asked. A crisis is about unexpected losses not expected losses, he added.
Acharya said he doesn’t expect a run-on-the-bank scenario so much as a collapse in market values which will cause contagion “stop” the intermediation in the market by insurers, who will not be buying RMBS or any MBS and withdraw from bonds.
Later, Acharya explained in an email that raised an audience member’s question about insurance industry surplus (about $672 billion estimated) as a buffer that these surplus calculations “do not account for unexpected losses, I think, and ignore off balance sheet liabilities at captives. It also would be odd to give the firms capital relief for RMBS on one hand and tighten through surplus elsewhere,” he stated.
“The plan was to give capital relief to undercapitalized insurers and allow them to get into the space banks were withdrawing from, by earning fat yields on subIG (investment grade securities) …But even if justified in 2009, why should the relief be permanent?” he said in the email.
Acharya, who covered a chapter of a book he is writing (Chapter 9) with Matt Richardson, entitled Modernizing Insurance Regulation, (Wiley and Sons, Inc.) said it was worrisome that there seems to be insurance risk-taking across an investment grade classes, and fall at the edges of each investment class to the extent they can, and noted insurers have become the buyer of last resort for sub-investment fade RMBS at a time when banks are pulling back.
“There s a huge killing to be made here,” he said, guessing at insurers’ motivation, and there will be a housing crisis in the next 20 years and companies like MetLife could fail, he said.
He wanted to know why the NAIC has made permanent the capital relief it is giving insurers’ investments.
In the preface to the upcoming book, Acharya and Richardson write: “The insurance sector may be a source for systemic risk. In brief, we argue that the insurance industry is no longer traditional in the above sense and instead (i) offers products with non-diversifiable risk, (ii) is more prone to “runs” (iii) insures against macro-wide events and (iv) has expanded its role in financial markets. This can lead to the insurance sector performing particularly poorly in systemic states, that is, when other parts of the financial sector are struggling. We provide evidence using publicly available data on equities and credit default swaps. As an important source for products to the economy (i.e., insurance) and a source for financing (i.e., corporate bonds and commercial mortgages), disintermediation of the insurance sector can have dire consequences.”
In remarks to audience members gathered afterward, Acharya alleged that the company Google, for example, was safe, a certain pharmaceutical company was safe, but MetLife was not “safe.”
Earlier, in his presentation, Acharya, who has been an academic advisor to the Federal Reserve Banks of Cleveland, New York and Philadelphia and teaches credit risk, noted that MetLife owns an affiliated firm that reinsurers MetLife and that the AM Best rating ignores the captives. Its failure would costs state guarantees funds more the $15 billion, he said.
“Regulatory arbitrage” has allowed the insurance sector to free up reserves and increase its size, something over which various federal government offices are also noting.
He suggested insurers put pressure on state regulators to have the investment grade requirements for RMBS be almost the same as the sub-investment grade RMBS.
MetLife and Prudential were not in attendance and did not have a comment.
Acharya’s charts show high capital shortfalls for MetLife and Prudential in the case of a 40% market correction, above that of Bank of American and JP Morgan.
Insurance representatives and others weren’t buying it. Most have heard the warning bells about captive reinsurance before, but did not accept the scenario where the large insurers would fail in a housing crisis. The insurers would continue to buy in the market and people would continue to buy life insurance, one insurance representative noted.
Marty Carus, an industry consultant and former AIG and New York state insurance department official noted that RMBS performance from 2008 to 2010 in terms of cash flow was healthy. During this period, the industry lost minimal cash flows and cash flows are what was important as opposed to unrealized losses due market price decreases that caused write-downs, according to Carus. There is almost “no likelihood” of Prudential or MetLife failing with industry surplus,the long-time insurance regulatory official said.
Even if MetLife’s and Pru’s “RBC hit mandatory control level, they are eminently solvent (that is more assets than liabilities). Moreover, point estimates of required capital levels make little sense. If there is a temporary decline in asset values but no real loss of cash flows, companies can flow in and out of solvency. That is why during the Great Depression, valuations of debt securities (i.e., bonds) went to amortized values. Market values had decreased so markedly during 1930 that industry would be broke nominally but not actually,” Carus said in an email.
Acharya disagreed with arguemtns about this in general. “I think MetLife can fail,” Acharya said, charging that CDS fluctuated a great deal in 2008 and now almost 50% of RMBS are sub investment grade.
NAIC CEO Ben Nelson said on the panel in response to the myriad accusations that the “NAIC is on it,” and noted the NAIC work on principles-based reserving (PBR). Because of NAIC’s implementation of PBR, on will see “less use of the captives,” Nelson said. He reiterated the stance that the state system has worked and that the last crisis was not an insurance failure but an AIG failure.
But the professor warned that, “If we don’t harmonize insurance principles,” there will be problems and said this was a problem for the Financial Stability Oversight Council (FSOC) housed at Treasury. FSOC members and staff were among those in the audience. MetLife filed an appeal early this month to fight its proposed systemically risky financial institution (SIFI) designation by the FSOC. MetLife’s appeal will take place this fall, and if it fails, it could take the matter to court.
Failure would impact policyholders too, he said in a follow-up email.
“The insurance firms have been buying sub-IG tranches….So if losses exceed expected losses, for which they have not reserved and increasingly kept low equity cushion, policyholders and more likely federal taxpayers, will be on the hook,” Acharya said.
Feeling flush, NAIC is reducing some fees, costs in 2015 budget
The National Association of Insurance Commissioners (NAIC) is cutting back costs to insurers and others by reducing fees in assessments and database filing fees, areas where it has historically gotten much of its revenue.
According to its proposed budget, the NAIC is pretty comfortable–at least for now–with its liquid operating reserve ratio and is even revisiting the target number.
In its budget proposal unveiled this week, it proposed reducing the filing fee structure for database filings by five percent and the filing fee caps by five percent, among other service reductions in a total of four areas.
In other areas, travel and salaries continue to rise. Salaries, taxes and benefits comprise the largest share of the 2015 budget at almost 60% of the total operating expense.
Salaries, taxes and expenses are projected to total $57,563.4 million for 2015 compared with $53.679 million projected for 2014. Salaries alone will total $44.872 million for 2015, a 4.6% increase over 2014, for the NAIC, which has about 470 full-time employees, reflecting pay increases and overtime, among other factors, according to the NAIC budget spreadsheet.
And the projected 2014 net revenues is $5.5 million over expected amounts, in part due to investment income and database fees as well as valuation services revenue due to revenue from structured securities project revenue including third party dataset sales.
Database filing fees are part of the NAIC’s bread and butter revenue, used to support the NAIC’s financial solvency program in-house and via state insurance departments.
In 2014, a total of 4,817 companies, including 29 groups, were assessed a total of $26,823,629, up $500,00 from 2013.
But for 2015, the NAIC budget plans an overall decrease of 2.32% to $25.744 million for database fee revenue.
Database fees have always been a key component of NAIC’s total revenue, and once were contested by some in the industry back in the 1990s. They are 29.5% of the 2014 budget composite mix, and were 27.2% in 2013. N One of the reasons the 2014 spending is expected to exceed the budget is because database fees were $467,000 higher than budgeted due to higher than budgeted insurance premium growth.
Now, they are projected to go down to 28.4% in 2015 because of the NAIC’s newly proposed reduction for industry.
Publications and valuation services are other sizable components of the budget which the NAIC is proposing to rein in a bit.
The NAIC is funded in a number of different ways including member assessments; database filing fees; the sale of publications; the provision of security designations; evaluation of some mortgage-backed securities owned by insurers; education and training registration fees; transaction filing fees; meeting registration fees; and a number of other services.
The NAIC is projected to generate service revenues of $91.6 million in 2014 with projected costs of just over $92.7 million.
The NAIC’s proposed 2015 budget includes total revenues (including investment income) of $94.3 million and total expenses of $96.1 million, a 1.1% and 3.4% increase, respectively, from the 2014 budget.
In addition, the NAIC is projected to generate a healthy investment income of nearly $6.9 million which could be more, or less, depending on the financial returns from the association’s long-term investment portfolio during the second half of 2014.
The long-term portfolio of investment income is one of the key factors in the NAIC being able to maintain its financial position The NAIC says it will continue to exercise close oversight of this portfolio and invest in a prudent manner but it is impossible to predict outcomes. Returns generated by the long term investment portfolio, garnered the NAIC net assets of almost $115.4 million at the end of 2013.
Thus, the NAIC leadership is choosing now, when the association is apparently flush and healthy, apparently, as the time to pass on some reductions to its stakeholders.
Given the NAIC’s financial results for the first half of 2014, “it is an appropriate time to review the association’s revenue streams and make a recommendation to modify the current structure,” the NAIC stated in the proposed budget summary.
The main objective of the proposed modification is to take into consideration all
funding sources and develop an approach that is “fair, equitable and viable in the future,” the NAIC stated.
Back in 2001, projected revenue was a little less than $47 million and database feels were continuing their rise based on premium volumes for insurers.
The 2012 NAIC proposed budget was for about $79 million.
The Liquid Operating Reserve
The NAIC has long been concerned about maintaining a healthy liquid operating reserve even as insurers have complained about excess funds in the NAIC’s coffers over the years.
The NAIC-retained consultant, Grant Thornton recommended back in 2011 that the NAIC’s operating reserve target from a flat 80% to a target range of 80% to 91%.This targeted ratio was based on current and future identified risks and was benchmarked to “comparable organizations.”
The NAIC leadership wrote at the time, “…the complexity of insurance regulation is increasing, resulting in a higher level of uncertainty and increased business risk, thereby, warranting a higher operating reserve target.”
This ratio is calculated by subtracting net fixed assets from total net assets and then dividing by projected expenses for the next year.
The NAIC uses this ratio as a gauge in determining the level of funding available to an association in times of financial distress.
As of Dec. 31, 2010, the NAIC maintained a liquid operating reserve ratio of 79.3%. By the at the end of 2013 was 106%.
The NAIC said this week in its proposal that a new review will be undertaken in the latter part of 2014 to recommend a new reserve target ratio for the association. The report should be completed in the latter part of 2014 or early part of 2015.
Other areas seeing reductions
The other areas for reductions as part of this initiative are:
2) to remove Securities Valuation Office (SVO) assessment instituted in 2004 when the SVO restructured product pricing. An assessment of $1,580,000 was implemented to ensure theNAIC had adequate financial resources to provide services. This assessment is allocated to insurance companies with total investments in nongovernment securities and preferred stock of $1 billion or more. Although the NAIC budget included the assessment from 2005 through 2011, insurance companies were only billed half of this amount. In the 2012 and subsequent budget, the assessment was reduced to $790,000. The entire amount has been billed in July of each year.
3) Eliminate fees for consumer guides and all publications
provided in an on demand electronic format, except for the top 10 publications
reducing 2015 budgeted revenues by $953,264
and
4) Lower the member assessment by 5% and institute a cap of $125,000. The current assessment structure was implemented in 2001 and is based on each member’s share of total insurance premium volume within their jurisdiction.
This would result in a reduction of $194,024 in 2015 projected revenue.
The continuation of these reductions in future years is contingent upon the NAIC being able to maintain a solid financial foundation to be able to
support to state insurance regulators, the NAIC said in its budget proposal.
Many had not reviewed the document yet.
A public hearing is tentatively scheduled for Nov. 12. Once the conference call time has been finalized (by mid-October), the details will be posted on the NAIC website.
BREAKING: MetLife will appeal proposed SIFI designation
Washington, Oct. 3 — MetLife will be appealing the preliminary designation of nonbank systemically important financial institution status.
The U.S’s largest life insurer delivered notice today to the Financial Stability Oversight Council (FSOC) requesting a written and oral evidentiary hearing to contest the Council’s proposed determination.
The Council must then schedule the hearing within 30 days after MetLife’s request.
If MetLife is designated by the Council as a non-bank SIFI, it will be subject to supervision by the Board of Governors of the Federal Reserve System and be subject to enhanced prudential standards under the Dodd-Frank Act, which may include requirements regarding risk-based capital and leverage, liquidity, stress-testing, overall risk management, resolution plans and early remediation, and may also include additional standards regarding capital, public disclosure, short-term debt limits, and other related subjects as appropriate.
FSOC has to make a final determination on MetLife’s status as a non-bank SIFI within 60 days after the MetLife hearing.
MetLife CEO Steve Kandarian said last month in a statement after the FSOC handed MetLife a preliminary designation that, “MetLife strongly disagrees with the Financial Stability Oversight Council’s preliminary designation of MetLife as a SIFI.
“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,” Kandarian stated then in language consistent with the message of the company over the past two years. It has been fiercely opposed to the idea it may be systemically risky–that its failure could imperil the US financial system.
However, it has also proposed modified prudential capital requirements for insurers designated as SIFIs in presentations to regulators, perhaps just in case.
“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.
Fed oversight will include requirements regarding risk-based capital and leverage, liquidity, stress-testing, overall risk management, resolution plans and early remediation, and may also include additional standards regarding capital, public disclosure, short-term debt limits, and other related subjects, MetLife stated in an 8-K disclosure to the SEC this afternoon. The news came at the end of the 30 day window for appeal notice after the Sept. 4 proposed designation vote by the FSOC.
The Fed, for its part, is still learning how to regulate Prudential at the Boston Fed and AIG at the New York Fed.
Both insurance SIFIs have already filed resolution plans, as required, and the Fed Board just this week unveiled a q<a href=”If the Company is designated by the Council as a non-bank SIFI, it will be subject to supervision by the Federal Reserve System and be subject to enhanced prudential standards under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which may include requirements regarding risk-based capital and leverage, liquidity, stress-testing, overall risk management, resolution plans and early remediation, and may also include additional standards regarding capital, public disclosure, short-term debt limits, and other subjects.
The Fed unveiled this week a quantitative impact study on insurance capital data designed to help tailor capital requirement standards for the insurers in its supervisory stable.
MetLife said it would not comment beyond its 8-K. It is not known whether MetLife would appeal to the court system. Prudential Financial appealed to FSOC, but the Council’s decision was upheld in a 7-2 vote. It decided not to challenge the designation in the court system where a high bar for proof exists.
A interesting part of MetLife’s potential designation will be the rationale used by FSOC if it designates MetLife. 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 after Prudentials’ failed appeal of its SIFI mantle that the insurer’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 last fall.
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 so-called Second Determination Standard, dealing with the activities of an institution, into play.
Until there are public statements, it is still unclear to the public what the FSOC rationale for MetLife as a proposed SIFI actually is or will be.
There are 10 voting members of the FSOC, one of whom, Roy Woodall, is an appointed insurance expert. Others represent various federal agencies dealing with banking, securities, mortgage financing and derivatives.
There are also nonvoting members who weigh in.National Association of Insurance Commissioners President and North Dakota Insurance Adam Hamm is now the NAIC’s representative to the FSOC, taking Missouri Insurance Director John Huff’s place. Huff dissented to the Prudential designation as a non-voting member of FSOC. His dissent is still part of the record. Hamm will be in place to vote on the MetLife designation.
MetLife, through its subsidiaries and affiliates, is one of the largest life insurance companies in the world Serving approximately 100 million customers, MetLife has operations in nearly 50 countries and holds leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East.
WASHINGTON INSURANCE RIDER 