Washington Insurance Rider Coverage UPDATE

I love writing this blog here in Washington and hope you enjoy or at least get some insights from reading it.
I only regret I didn’t cover even half the stories I wanted to, from more machinations on legislation over renewal of

Lovely morning photo of US Capitol before scaffolding, by Jessica Gardner

Lovely late summer morning photo of Capitol before scaffolding, by Jessica Gardner

the Terrorism Risk Insurance Act to exploring the inter-industry dispute now brewing — or should one say boiling over — on the alleged use of misleading illustrations of indexed universal life (IUL) products.
At a time when insurance group capital and other standards will be fashioned to be adopted by nations and states alike, when disasters rattle, boom, blow,and crush, as the globe undergoes climate change, when viruses cyber and pathological alike spook communities,and the middle class population ages and is forced to face its retirement needs head-on, as the Federal Insurance Office (FIO) keeps pointing out the explosive growth of insurance premiums in emerging markets and what it means (what does it mean?), well, the need for wide-ranging insurance regulatory coverage is important.
This wide lens perspective is needed along with an eye for the minutiae that matters. Legal or legislative language when overlooked could later mean so much to so many industry participants — just see the Dodd Frank Act’s Collins Amendment. There will be stories to be told of the people that drive the insurance regulatory and legislative space, as well. We will look at their agendas, their consumers and clients, their goals and projects, their targets, their ascensions and their falls, their meetings and their votes in closed rooms, their invitations not extended and their recollections.

Thank you,

Twitter @LizFesta

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.

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.

Nonbank SIFIs agenda set for Sept. 4 FSOC. Is MetLife SIFI-hood soon?

 Treasury Secretary Jacob Lew has scheduled  a closed session of the Financial Stability Oversight Council  (FSOC) for Thursday, Sept. 4.
If  later designated, MetLife 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 and the time-frame to respond elapses.
According to the FSOC’s notice, the preliminary agenda next week includes a discussion of nonbank financial company designations, consideration of the Council’s fiscal year 2015 budget, a discussion of the its analysis on asset management’s systemic risk, if any, and an update on the Board of Governors of the Federal Reserve System and FDIC’s recent review of resolution plans submitted by large, complex banking organizations.
Although the book is closed on MetLife now, after an August 19 notational vote by FSOC in a closed session, that doesn’t mean the FSOC is necessarily ready with its proposal to designate MetLife and has scheduled a vote. The  Council agenda’s use of the word “preliminary” means things are still fluid in workflow in that corner of the world that determines SIFI designations. It is also understood, based on earlier minutes referring to presentations from the Federal Insurance Office (FIO) that there is another insurer under review, in Stage 2 of SIFI analysis. This may be Berkshire Hathaway, as was suggested by Bloomberg news reports  in early 2014.
On Aug. 19,  the Council deemed its evidentiary record regarding a nonbank financial company

to be complete in accordance the rules and guidance of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
FSOC will not officially identify the institutions under review until a final determination is made but MetLife, like Prudential Financial land AIG before it, has made no bones about its position. It also has opposed SIFI status in public remarks for well over the year MetLife has been under consideration.
There is legislation pending in the House meant to establish a six-month moratorium on SIFI designations and to make the meetings open to more officials developed by members who fear a black box operation at the FSOC.  Meanwhile, in both chambers of Congress, there is legislation to make Section 171 of Dodd Frank, the so-called Collins Amendment, flexible so it does not establish unwanted minimum capital standards in line with bank models on insurers supervised by the Fed, which include not only SIFIs but insurers with savings and loans. The Fed’s general counsel Scott Alvarez  has issued an opinion that as Section 171 stands, there is no flexibility to carve out a way to treat insurers differently.
MetLife, along with AIG and Prudential, are already deemed to be global systemically important insurers (G-SIIs). reinsurers are expected to be named by the  International Association of Insurance Supervisors (IAIS)  and the G-20’s  Financial Stability Board (FSB) in November.

Thursday’s Child: Vote on TRIA renewal now set for Friday, June 20

The new U.S. House Terrorism Risk Insurance Act extension bill will go to a vote Friday morning, now, in the House Financial Services Committee (HFSC)  after a long debate Thursday, with a variety of amendments added and withdrawn into the afternoon.

The bill , H.R. 4871, appears to poised to move to the floor along party-line votes, although both Democrats and some  Republicans have qualms about some of the provisions. If it does not pass, the HFSC leadership will allow “a clean,” half-year extension only to go to the  House Floor.

However, all was studied politeness and patriotism at the mark-up today as Committee Chairman Jeb Hensarling,R-Texas,  thanked members for voicing their opposing views while noting that the bill has been debated for over a year, and all sides heard. Carolyn B. Maloney (D-NY) was among  the first out with a statement from the Democrats opposing the  bill, even though she sad it was a “significant improvement over previous drafts.” Her concerns  are increasing the trigger for the government backstop from $100 million to $500 million; and treating “conventional” terrorist attacks differently from so-called “NBCR attacks” – nuclear, biological, chemical, and radiological attacks.

“These changes would drive small- and medium-sized insurers out of the market entirely – which would actually reduce the amount of terrorism insurance available to businesses,” Maloney stated.

There have been a number of changes in TRIA over the past dozen years, Hensarling said, to parry complaints about the proposed rise of the trigger to $500 million, along with increases in the recoupment and co-pay amounts.

However, the increase to $500 from $100 million is 500%, not the incremental percentage changes of earlier increases in industry cost amounts, several lawmakers  on both sides of the aisle argued. Hensarling said that the bill, sponsored by Rep. Randy Neugebauer, R Texas, chair of the Housing and Insurance Subcommittee,  is not an end to TRIA at all, as seems to be the theme among  some of his his colleagues,  as he said.  “To amend it is not to end it, he said.

But with the current legislation, “You have a program but no one can afford it,” said Rep. Michael Capuano, D-Mass. Rep. David Scott, D-Ga.,  even went as far as to suggest a $500 million trigger would be fodder for terrorists now watching Congress’ every move on TRIA, including one that would be “foolish” and “irresponsible” by placing the U.S. “on its knees” in its ability to regain its footing and rebuild after a terrorist event by effectively getting rid of the federal backstop, as he believes the  legislation’s higher trigger amount would do.

One significant addition is the inclusion of NARAB II, a non-profit clearinghouse, the National Association of Registered Agents and Brokers (NARAB) that would streamline non-resident market access for insurance agents and brokers by allowing full multi-state uniformity and reciprocity while keeping state  market conduct authority “to police bad actors,” as the National Association of Insurance Commissioners (NAIC) puts it. Rep. Ed Royce, R-Calif., did  question the need with an amendment for a review of NAIC governance pursuant to NAIC’s role in NARAB 2, and its authority to  recommending board members to the President, who would make the appointments. Another attempted amendment was the addition of the so-called Collins Amendment fix.

Like the FSOC, the Collins (Sen. Susan Collins, R-Maine) Amendment is a part of the Dodd Frank Act (DFA.) This amendment, DFA Section 171, does require minimum capital standards on all thrifts and bank holding companies as well as on nonbank systemically important financial institutions regulated by the Federal Reserve.

The fix offered by Rep. Gary Gene Miller, R-Calif, and Rep.  Carolyn McCarthy, D-N.Y.,  and supported by the Senate by and large, would free insurers as such from the minimum leverage capital requirements and minimum risk-based capital requirements on a consolidated basis.

For further coverage, see http://www.carriermanagement.com on Friday with information on the final House vote on TRIA and on legislation to put the brakes on, and allow more oversight of, the U.S. Financial Stability Oversight Council (FSOC.)

“We look forward to the Committee reconvening tomorrow to vote on the TRIA reauthorization provisions pending before the Committee. We are also very pleased that NARAB II was adopted by the Committee and will be included in the House TRIA Reform Act,” stated Nat Wienecke, senior vice president, federal government relations, of the Property Casualty Insurance Association of America.

Congress passed the Terrorism Risk Insurance Act of 2002 in the aftermath of 9/11 for fear that the lack of available terrorism insurance could harm economic development and since 2002 the market has stabilized, risk management has improved, modeling has advanced, and premiums have decreased by 70%, according to Neugebauer.

Moveable feasts of TRIA & insurer capital await House calendar after Senate victories

Two pieces of legislation atop many U.S. insurers’ wish-list celebrated success in the Senate June 3 and could find themselves part and parcel of a larger bill in conference if companion legislation moves forward in the House.

The Senate Banking Committee passed the Terrorism Risk Insurance Association’s (TRIA) reauthorization Tuesday 22-0, the first such movement of any TRIA reauthorization legislation this year.  The House course of action on TRIA is widely said to be caught up in House Financial Service Committee leadership concerns.

Also Tuesday, the full Senate approved legislation (S. 2270) that would allow the Federal Reserve Board’s flexibility to develop insurance-based capital standards for insurance companies under its supervision.

Basically, the bill  would temper the effects of the Dodd-Frank Act’s seemingly watertight  Collins Amendment on development of capital standards for systemically important insurers, thrift/ savings & loan holding companies (SLHC’s) and any future insurance company that would or could come under the Fed’s purview.

Although the House has not forged legislation yet on TRIA, it is the centerpiece of any insurance potential lawmaking this year, so many say it could carry along any Dodd-Frank fixes with it once (and whether) it climbs through both chambers of Congress.

Housing and Insurance Subcommittee Chairman Randy Neugebauer, R-Tex., is expected to soon introduce the House`s TRIA reauthorization bill, according to the property casualty insurance lobby. Although a slim reauthorization package has been suggested, and insurers clamor for broader cushions, some compromise action is anticipated, as urgency among insurers grows.

Earlier this year, the Fed temporarily exempted life insurers from bank-centric rules while it explored capital standard options for life insurers. Fed officials have testified or shared that the Collins Amendment, or Section 171, gives them little flexibility to exempt or change life insurers from strict minimum capital standards intended for banks.

S. 2270 is designed to give the Fed the ability to develop insurance-specific standards for insurance companies as it moves forward.

In the House, there is legislation, although it hasn’t gotten the ride it has in the Senate.  Gary Miller, R-Calif. and Carolyn McCarthy, D-N.Y., and 51 cosponsors are pushing for  H.R. 4510.

The American Council of Life Insurers (ACLI) says rules governing life insurers on all issues must be appropriate for life insurers. “There is broad agreement on this position. The Obama administration, Democrats and Republicans in the House and the Senate, state and federal regulators and private industry all agree that life insurers should not be subject to capital standards more suited for the business of banking,” the ACLI stated yesterday.

Sen. Susan Collins, R-Maine, author of the Collins Amendment, Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns, R-Neb., for introduced S. 2270.

Swinging back to TRIA, the American Insurance Association (AIA) says it is confident that TRIA will be reauthorized in 2014 with strong bi-partisan support.”

“The program maximizes private market risk bearing while protecting taxpayers at every step.  By placing the financial recovery on the private market in all but the most catastrophic of attacks, TRIA protects the federal government and taxpayers from this potential exposure,” the AIA stated.

For a comprehensive overview of TRIA authorization history, see http://www.fas.org/sgp/crs/terror/R42716.pdf  TRIA was reauthorized in 2005 and 2007 after its first authorization in 20002 in response to the Sept. 11, 2001 terrorist acts.

Fed hires Tom Sullivan as its insurance chief

The Federal Reserve Board has hired an insurance regulatory chief after a long search for an insurance expert to fill the new position. Former Connecticut insurance regulator and industry consultant Tom Sullivan has accepted a position as the senior advisor for insurance to the Board of Governors.
A Fed spokesperson for the board said he starts the high-profile post June 9.
As such, Sullivan will be representing the Fed at all domestic and international insurance forums, he stated in an email to colleagues in the insurance sector.
Sullivan has most recently been a partner at PricewaterhouseCoopers. Word was that the well-regarded insurance regulatory expert was also once on the short list for NAIC CEO before the organization hired Sen. Ben Nelson, D-Neb., for the post a year and a-halfago.
The Fed, as a prudential regulator of systemically important insurers (non-bank SIFIs) and insurers with thrift holding companies (SLHCs), has an ever-more powerful voice in insurance regulation. The Fed is well as a member of the Financial Stability Board (FSB), has a seat at every table now, including at the International Association of Insurance Supervisors, in Basel.
The Fed has been seeking an insurance leader for some time, and several names have come up on the short list.
“I am excited to be joining the Fed and there is a lot of work to be done given their statutory authority as consolidated regulator for the designated insurer non-bank SIFI’s and the insurer owned SLHC’s,” Sullivan said in an email.
Sullivan will be working with insurance supervisory cohorts the NAIC’s international team of state regulators Kevin McCarty (Florida), Tom Leonardi (Connecticut) and Michael Consedine (Pennsylvania), among others, as well as the Treasury’s Federal Insurance Office (FIO.)
Sullivan takes the helm of the key insurance official title at a critical time. Controversial proposed capital standards are under development globally for insurers that are not only systemically important but that are also internationally active, and these standards must be translated to and put up for acceptance by local jurisdictions like the United States.
Congress, the Fed and U.S. insurers are struggling with what to do with seemingly inflexible strict minimum requirement capital standards that would also hammer down on insurance  SIFIs and thrift holding companies under Sections 165 and 171 of the 2010 Dodd Frank Act. Legislation is pending, with the American Council of Life Insurance (ACLI) taking out a full-page ad last week “highlighting the life insurance industry’s support for critical legislation (S. 2270 and H.R 4510) that would clarify the Federal Reserve Board’s authority to apply insurance-based capital standards to insurance companies under the Fed’s supervision.”
 Indeed,  a similar ad from the ACLI will run in Politico on June 4.
Sullivan served as Connecticut insurance commissioner throughout the 2008 financial crisis and AIG’s downfall. He was appointed by Republican Gov. Mary Jodi Rell in 2007. As chair of the NAIC’s LIfe Insurance and Annuities Committee  and has testified before Congress as a state regulator that prudential oversight of insurers by the states works, citing solvency and capital standards that “have ensured that policyholder commitments are met  and that companies remain stable.”
Sullivan is a lifelong Connecticut resident who graduated from Western Connecticut Sate University and got his MBA from the University of Connecticut.
Early reaction was positive from those who have worked with the amiable, well-seasoned executive.
“The Federal Reserve Board has made a solid appointment in choosing Thomas Sullivan, who has keen regulatory and industry insight. He understands the importance of state-based regulation, and the difference between banking and insurance. This is a great step forward that will benefit consumers and insurers,” stated current Connecticut commissioner and IAIS Executive Committee member Tom Leonardi.
Leonardi sits on numerous supervisory colleges as commissioner and is extraordinarily active in international insurance supervision,and will be working closely with Sullivan on capital standards for  and oversight discussions embedded in the IAIS’ ComFrame initiative and in higher loss absorbency standards for global systemically important insurers and reinsurers. The latter group, the reinsurers, is expected to be identified this summer by the IAIS.
NAIC President and North Dakota Insurance Commissioner Adam Hamm stated,”Tom’s strong regulatory experience, comprehension of the insurance sector, and thorough understanding of America’s national system of state-based insurance regulation will be a tremendous asset to the Board on both domestic and international issues.We look forward to working with Tom in his new position as we continue to enhance our working relationship with the Federal Reserve.”

 

Author: Liz Festa,  June 2, 2014

 

 

Is FSOC exploring other options besides SIFI designations?

In a week when U.S. insurers flocked to testify or follow or promote Congressional hearings addressing easing Dodd Frank’s federal government powers strictures on insurance company oversight, U.S. Treasury Under Secretary for Domestic Finance Mary Miller opened the door to policy options for review of industries or companies under review for systemic risk.

But is it enough to allow insurers through? Or, has that door shut?

The Treasury Secretary chairs the Financial Stability Oversight Council (FSOC) that reviews threats to stability and designates financial institutions like Prudential Financial and AIG as systemically risky (SIFIs.) If FSOC identifies risks posed by asset managers or their activities that pose a threat to financial stability, it has a number of policy options, Miller stated during an FSOC-hosted conference on the asset management industry May 19.

These options include highlighting potential emerging threats in its annual reports to Congress, making recommendations to existing primary regulators to apply heightened standards and safeguards, and, of course, the SIFI-label: designating individual firms on a company-specific basis.

“If we identify risks that require action, we will seek to deploy the most appropriate remedy,” Miller stated in her remarks. However, “it is possible that at the end of this comprehensive review, the Council may choose to take no action,” she allowed.

Options seen as less radical than a SIFI designation which subjects  a company to enhanced (to put it mildly) prudential supervision under the Federal Reserve Board’s regime were previously raised in the dissent of then-acting director of the Federal Housing Finance Agency, Edward DeMarco, to the FSOC’s 7-2 vote on Prudential’s SIFI designation.

“To the extent that the Council has concerns about the potential for runs on standard products and existing regulatory scrutiny, those concerns would be better addressed by tools other than designation, such as the Council’s Section 120 authority,” DeMarco wrote in September in his dissent. Section 120 holds that FSOC may provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards, including standards enumerated in section 115, for a financial activity or practice conducted by bank holding companies or nonbank financial companies under their respective jurisdictions, instead of blanketing the company itself with a SIFI designation.

FSOC’s plunge into the intense review of the asset management industry coupled with this apparent new tack doesn’t mean that MetLife is off the hook as a future SIFI, though, even though MetLife is a huge asset manager already.

The New York insurer, and one-time bank holding company, has been under Stage 3 review since mid-July 2013, likely the longest Stage 3 review thus far for a company.

If MetLife were cited as a SIFI on the same basis as Prudential, beginning with a distressed company and a run-on-the-bank by millions of policyholders and the ensuing contagion scenario, the oft-cited dissent from FSOC insurance expert Roy Woodall would probably be similar, which may be unpalatable to Treasury, even if the votes are there to designate MetLife.

At a hearing also this week on FSOC designations as a possible danger to the U.S. financial system, Woodall’s statement that FSOC’s “underlying analysis utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems,” was quoted by Eugene Scalia of Gibson, Dunn & Crutcher LLP in Congressional testimony May 20.

Treasury probably wants to avoid listening to, over and over again refrains similar to, “the designation of Prudential purports to be based on a risk assessment, but a risk analysis that assesses neither the probability nor the magnitude of the event is not a risk assessment at all,” as stated by as Scalia in the Tuesday House Financial Services  hearing.

Also this week, House Financial Services Chairman Jeb Hensarling, R-Texas, called on FSOC to “cease and desist ” SIFI designations until it gets questions answered, and many are trying to push for greater FSOC transparency, so the FSOC bloom is off the rose, for now.

“Many think it odd that FSOC has chosen insurance companies and asset managers as targets for SIFI designation when there are others that pose far greater risks to financial stability.  Insurance companies are heavily regulated at the state level, and asset managers operate with little leverage. And since they manage someone else’s funds, it is almost inconceivable that an asset manager’s failure could cause systemic risk,” Hensarling stated.  

Treasury’s Miller also broached the  subject of the work of the Financial Stability Board (FSB) in ongoing work regarding the identification of global systemically important financial institutions. MetLife has already been identified as a global systemically important insurer (G-SII) by the International Association of Insurance Supervisors (IAIS), under the direction of the FSB, and some on Congress have expressed concern that a foreign body that is not a regulator is somehow directing domestic policy on U.S. capital and other standards. The NAIC, the state insurance regulators,  think the FSB mandate is so powerful, they want to be part of the group or its discussions.

Miller took the opportunity to try and allay these concerns.

“While the FSB and the Council have a shared objective of promoting financial stability, it bears emphasizing that the domestic and international processes are entirely independent.  In its work, the Council adheres to the standard and considerations for designations that are listed in the Dodd-Frank Act and in the Council’s public guidance,” Miller stated.

The Council is the only authority that can designate an entity for Federal Reserve Board supervision and enhanced prudential standards,” she stressed.

Concerns about dealing with so-called bank-centric capital standards themselves also had another airing when the Housing and Insurance Subcommittee of the Committee on Financial Services heard testimony on H.R. 4510, the legislative fix to the Collins Amendment in Dodd Frank that would free Federal Reserve-supervised insurers from preparing statements in accordance with GAAP and their assets and liabilities from the minimum leverage capital requirements and risk-based capital requirements required under Sen. Susan Collins’, R- Maine, now infamous Section 171.

 

Author: Liz Festa, in Washington, May 21, 2014

New York Life to take on insurance capital standards policy in Washington

Expect New York Life to become an engaged and active player, even a leader, on insurance capital standard discussions in the nation’s capital.

New York Life Chairman and CEO Ted Mathas galvanized a panel discussion on capital standards for insurers globally and domestically at the NAIC international forum by warning regulators that if standards aren’t properly developed, it might damage insurers’ ability to do some good in the marketplace.

Mathas said New York Life, a proud mutual insurance giant with assets under management of $425 billion in 2013 and a surplus and asset valuation reserve of $21.1 billion, an all-time high, said the company does not expect to be named systemically important either globally or by the Treasury-led Financial Stability Oversight Council (FSOC).

However, Mathas said the capital standards under development for internationally active insurers and the systemically risky or important global and domestic insurers will get worked into a broad part of the industry and possibly bleed into rating agency reviews and more broadly affect the role of insurance in society.

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, Mathas said, referencing Prudential Insurance and its pioneering of pension risk transfer mega-deals.

Prudential Vice Chair Mark Grier, who sat beside Mathas on the panel platform, slightly nodded. Grier already has been very active in talking to the Federal Reserve Board and other Washington officials given Prudential status as a global systemically important insurer (G-SII) and a U.S.  systemically important financial institution (SIFI).

If assets are treated as short term and there is a one size fits all market consistent methodology, you take away the value added benefits of the insurance industry, Mathas argued.

Mathas is currently making the rounds in Washington and plans to work with other parties to come up with a unified industry statement, or at least one for the company, in response to industry requests and an internal company decision to become engaged in the capital standards debate.

Yoshi Kawai, secretary-general of the International Association of Insurance Supervisors (IAIS) was just as excited to talk about the pursuit of capital standards.

“I cannot stop the feeling of excitement when I talk about capital,” Kawai offered.

Kawai did acknowledge that the market valuation issues are still open to debate and no decision has been made, although it was argued from the  audience that this market valuation debate has persisted for a decade or more and continually creeps into any discussion of global accounting standards.

“When we are regulators, we cannot communicate with the same number, we have to change. We have to change now. Otherwise, it is too late,” Kawai said. There is progress in supervisory colleges but when we compare numbers and discuss them, we do not have the same amount, Kawai lamented.

Kawai and those he works with are seeing an appetite and need for capital standards as European, U.S. and Japanese insurers press further into emerging markets for company growth. Developing markets are hungry for a capital standard too, Kawai noted. Kawai, also a member of the FSB, paid acute attention to a keynote presentation on market trends from Manuel Aguilera-Verduzco, president of the National Insurance and Sureties Commission, MexicoAguilera-Verduzco was chairman of the IAIS between 2001 and 2004.

But Mathas tossed aside Kawai’s analogy on comparability which he made based on temperatures measured in Fahrenheit while landing in the United States on a particularly hot May day  when he is more familiar the lower Celsius number readings.

Mathas response to this was to put on a jacket or sport short-sleeves depending on how warm one’s body feels, respecting regional differences as one already does with climate differences.

Mathas’ solution, which may be difficult to implement with the Collins Amendment in Dodd Frank as a barrier, is to have the Fed utilize stress tests on its insurance stable of companies. Just take prescribed scenarios and run them across cash flows of a asituation and see how they do, Mathas said.

Barring a loose or liberal interpretation of the Collins Amendment (Section 171 of Dodd-Frank) by Fed officials, who many agree are not inclined to monkey with the statute, or the industry-proposed legislative fixes awaiting action in Congress, such a simple or even elegant solution is going to have a very difficult path ahead.

Industry and regulators did agree there is a sense of urgency now with the capital standards under development at the IAIS  at the behest of the G-20‘s Financial Stability Board (FSB)and at the Fed.

Missouri Insurance Director John Huff, the non-voting NAIC appointee to the FSOC, described the capital standards a “bullet train coming down the track.”

Everyone knows the drill. BCR or backstop capital requirements are due this year, perhaps by this July, HLA or higher loss absorbency for global systemically important insurers net year, or 2015, ICS capital standards for  all internationally active insurance groups to be developed in 2016  and applicable in 2019, standards  Huff and others in the U.S. view as having “wide-ranging implications” coupled with unprecedented data collection.

“Someone needs to give the Fed flexibility administratively or legislatively,” Grier said.  “And then there has to be  convergence so we don’t have four different capital standards coming from G-SII, SIFI, ComFrame and the NAIC,” Grier added.