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.

House TRIA drama upstages Senate’s passage of bill

July 17–The Senate passage of a seven-year extension Terrorism Risk Insurance Program Reauthorization Act of 2014 (S. 2244) 93-4, complete with the package of National Association of Registered Agents and Brokers legislation (NARAB II) as an amendment, doesn’t mean the package will move to a complete legislative bill ready to sign anytime soon.
Division among various interests in the House to delay the legislation in the House, despite the smooth passage in the Senate. The current law, which expires at the end of this year.

House Financial Services Chairman  Jeb Hensarling of Texas

House Financial Services Chairman Jeb Hensarling of Texas

In the past two days, the GOP whip operation has polled Republican members and those the whip counts have been mixed, which signal delay as loud as anything, as sources noted.
House Financial Services Committee Jeb Hensarling, R-Tx., led his committee to pass a five-year extension bill in mid-June that would treat conventional and nuclear chemical biological and radiological (NCBR) terrorist attacks differently, increase in the trigger for government payouts associated with conventional attacks and increased mandatory recoupment amounts.
As of this week, despite being tentatively on the House calendar for a floor vote, H.R. 4871 did not poll well, even before a whip count was attempted, with 218 votes still unlikely with the House bill as-is, sources close to the process said. Now that Hensarling has stated that, “Unfortunately, the Senate’s bill is essentially a status quo bill that uses a phony Washington budget gimmick as a pay-for, meaning it can’t even come to the House floor as written.”
Supporters of the TRIA extension are now looking at months before enactment, possibly, when just last week major insurers who supported both the Senate and the House versions were thinking in terms of days or a couple of weeks.
Certainty is of high value for insurers and commercial realtors as policies come up for renewal and no one knows exactly how to underwrite them.
The author of the bill and chair of the Housing and Insurance Subcommittee, Randy Neugebauer, R-Tx., and the House Leadership are fully behind the bill as passed by the Committee, and a Neugebauer aide underscored the point that a watered-down House bill was not welcome on the House floor. If it comes to the House floor, the bill will not be changed in any major, substantive way, he said.
Indeed, there are some members who feel it does not go far enough, not just those that think it goes too far in its widening of industry funds and capacity over time.
The House bill is supported by major insurers, producers, realty groups and associations and others. Small insurers openly oppose the $500 million trigger and not many don’t embrace the bill despite an opt-out provision on some measures.
The next few months -despite many fewer legislative days on the calendar– will be ones where the House Financial Services Committee leadership helps educate members who are not familiar with the TRIA program, and those that need help understanding the parameters of the bill, according to the Neugebauer aide, who indicated there is no rush and that they will be patient.
The six-month temporary extension will only come into play if the House cannot agree by ore before Christmastime.
“I’m still committed to getting a bill passed, but it has become very clear this week that the process is going to take several more months before there is a resolution….Washington is paying a lot of attention to one group’s concerns, but not enough attention to the other’s. That’s got to change if any TRIA bill is going to pass,” Hensarling stated.
“As this process goes forward over the next several months, I will be using that time to discuss with all members how to continue the program and also make reforms that improve our stewardship of Americans’ hard-earned tax dollars.”

On the action of the day, or as Hensarling put it, “…I’m pleased to hear that the Senate is at least working today,” in reference to the passage and the fact they have ignored job bills sent over to their chamber, insurers and other groups praised the Senate bill.
The Property Casualty Insurers Association of America (PCI) “commends the Senate for passing the Terrorism Risk Insurance Program Reauthorization Act of 2014. This long-term legislation will minimize the disruptions, maintain the availability and affordability of terrorism insurance for consumers, and protect taxpayers,” stated Nat Wienecke, senior vice president, federal government relations “It is great to see members of both parties come together in a broad bipartisan fashion to support America’s economic resiliency plan to recover from terrorist attacks.
“The strong bipartisan vote reflected a relatively smooth process through which the legislation was produced by the Senate Banking Committee, under the leadership of Chairman Tim Johnson of South Dakota and ranking Republican Sen. Mike Crapo of Idaho. The legislation tweaks the industry’s deductibles,” noted Joel Wood, The Council’s senior vice president for government affairs.
The tweaks include increases the “industry recoupment” by $2 billion a year to an overall level of $37.5 billion, and increases the insurer coinsurance level from 15% to 20% over five years.
The Senate legislation, S.2244, is strongly supported by the Administration, many sectors of insurance and commercial policyholder community, the real estate industry and the U.S. Chamber of Commerce. S. 2244 is opposed by the Heritage Foundation, the Consumer Federation of America and the free-market oriented insurance policy thinktank,  R Street Institute.
“Reauthorizing the program will ensure that the American economy remains resilient against the threat of terrorism. The Administration supports swift passage of this legislation and looks forward to working with Congress on this reauthorization and reform process,” came the statement from the WHite House before the vote.

But,according to R Street Senior Fellow R.J. Lehmann, “unlike H.R. 4871, the TRIA Reform Act … the Senate’s proposed seven-year extension fails to make appropriate changes to the program to shift more risk to the private sector.”
As Lehmann noted, the Senate bill does make modest adjustments to the federal share of terrorism losses, which gradually would be scaled back to 80 percent from the current 85 percent, the House bill goes further by raising the trigger level for coverage for conventional terrorist attacks to $500 million.
“Reinsurance broker Guy Carpenter recently issued a report finding that multiline terrorism reinsurance capacity is about $2.5 billion per program for conventional terrorism and about $1 billion per program for coverages that include NBCR,” stated Lehmann said. “The changes proposed in the House bill are well within the bounds of the private market’s existing capacity, and failing to make those changes would put taxpayers on the line for risks that should be borne by big corporations, property owners and insurance companies,” he continued.

NARAB is not a worry for most, although it slightly short of the “love fest” that one confident NAIC official once testified in the Senate it would be in March 2013.
Sen. Tom Coburn,R-Ok., who was one of the 4 Senate “Nay” votes, threatened to hold up Senate vote of the TRIA bill unless concessions were made on NARAB so a “sunset” of NARAB of two years after the first agent or broker receives a license from the clearinghouse was added to the Senate version. No such sunset exists in the House TRIA legislation to which NARAB is attached, sources noted.

The insurance industry will push for the elimination of the NARAB  sunset provision.

The NAIC noted, “while we have long supported the NARAB legislation, we do however have concerns with the inclusion of a sunset provision that could have adverse effects on insurance markets if NARAB were to come into existence and then ultimately be terminated.”

But,  as expected, most do want NARAB now to see the light of day and must pin their hopes on a  succsessful House and  Senate TRIA package.
U.S. Sens. Jon Tester, D-Mont., and Mike Johanns, R-Neb., stated today that the NARAB legislation is expected to lower prices through increased competition because insurance brokers can more easily register across state lines. It was added to a bill reauthorizing the federal backstop for insurance coverage for terrorist attacks.
Tester said, “This is a big step forward to create new opportunities for small agents and brokers and to provide consumers with a better product at a lower price. Streamlining the licensing of registered agents and brokers while maintaining state regulation of the insurance industry will increase competition and better protect consumers”
CIAB, which has been championing a clearinghouse for agents and brokers for many years, may finally see its work come to fruition if the TRIA bill gets past the remaining stumbling blocks.
“We are pleased that the legislation also includes our long-sought NARAB proposal to create a uniform agent/broker nonresident licensure clearinghouse,” said CIAB’s Wood.
“NARAB II is common sense legislation that creates a streamlined agent and broker licensing system that strengthens the competitive insurance market and protects consumers,” PCI’s Wienecke stated.
The Administration/Treasury also backs NARAB.

TRIA renewal bill not yet whipped and sawed by House

The Terrorism Risk Insurance Act (TRIA) could get a vote Thursday in the Senate as well as the House, although most say that division and discontent, as has been reported, could move the vote until next week.
No one yet is “feeling lucky.”
The Speaker’s office, when contacted early this afternoon said a vote was scheduled Thursday for H.R. 4871, but that is likely premature–observers and staffers say the 218 votes aren’t there yet for the bill that passed out of the House Financial Services Committee under Chairman Jeb Hensarling, R-Tx,  a month ago.

At best, they’ll get the GOP whip count Thursday, and that will determine whether–and then, when–the majority might schedule the vote, said one person familiar with the Leadership’s routine.

“No way,” said another regarding any vote in the Hosue on TRIA this week.

Majority Whip Kevin McCarthy, R-Calif.’s office said there was nothing on the schedule for TRIA as of yet.

In the meantime, where the two versions will meet in terms of their provisions for the program’s extension and trigger threshold is still an open question.

It would bifurcate nuclear, biological, chemical or radiological (NBCR) attack coverage from losses incurred from an attack using conventional (or non-NBCR) materials. In the House bill, which many insurers cannot stomach as-is, the trigger would increase incrementally from $100 million in calendar year 2015 to $500 million in calendar year 2019.
The Senate bill is a seven-year extension maintains the trigger at $100 million and increases the recoupment amount over five years by $10 billion. For more details, see <a href=”http://www.carriermanagement.com/news/2014/06/13/hr4871 CBO score” target=”_blank”>article:
H.R. 4871 would extend TRIA for five years, through Dec. 31, 2019.
The Congressional Budget Office (CBO)  has scored H.R. 4871, estimating that enacting H.R. 4871 would increase budget deficits by about $500 million over the 2015-2024 period. Changes in federal revenues and spending, however, would continue beyond 2024.
Enacting the renewal legislation would lead to additional spending of $250 million and additional revenues of $1 billion after 2024,the CBO estimates. Thus the estimated net budgetary savings after 2024 would be slightly larger than the estimated net budgetary cost between 2015 and 2024, the CBO stated July 15th. The CBO factored in the proposed National Association of Registered Agents and Brokers (NARAB II) reform, as well.
The CBO estimates that after taking into account all revenues and direct spending, enacting H.R. 4871 would lead to a small reduction in deficits over time.
At the same time, the establishment of NARAB, which is to be attached to the House and Senate TRIA bills during a vote now, is facing a sunset provision two years after the first license is issued in a floor amendment added by Sen. Tom Coburn, Md., R-Ok.
Some say it could have been worse and that NARAB otherwise has very strong, bipartisan, bicameral support.
According to one source, Senate supporters of NARAB and TRIA reached an agreement with Coburn where he would agree to a two-year sunset of NARAB – two years after the first NARAB license is issued to an individual after some back and forth on the clearinghouse provision.

UPDATE: TRIA Renewal voted out of House Financial Services Committee 32-27

The new U.S. House Terrorism Risk Insurance Act extension was voted out of the House Financial Services Committee (HFSC) Friday morning 32-27, with Democrats objecting to many of the provisions increasing the insurance industry exposure, arguing  it could lead to job loss issues and concentration of risk. 

TRIA Reform Act of 2014, H.R. 4871, legislation to reauthorize the Terrorism Risk Insurance Act (TRIA), will now go to the House floor, and get passes, insurers hope, before the August recess. It is here where insurers and others hope to  soften the terms of the HFSC’s version, including the $500 million trigger, the 20% co-pay and the recoupment amounts.

Also attached was the proposed NARAB 2 producer clearinghouse, the darling of the insurance broker community, and two separate bills on the Financial Stability Oversight Council (FSOC), on opening it up to more federal participants or observers  and to the Sunshine Act, and another putting a six-month moratorium on any designations. The FSOC bills are separate, and not attached to TRIA, as NARAB 2 is.

An amendment by Democrats to extend the five year TRIA program extension to 10 years was defeated.

 NARAB 2 was accepted on a unanimous bipartisan basis as an amendment by Insurance Subcommittee Chairman Randy Neugebauer, R-TX. The FSOC bills also split along party line votes, with Republicans the majority. 

“As the debates made clear yesterday, the proper role for the federal government in backstopping terrorism losses is an exceptionally sensitive philosophical debate.  While both House and Senate leaders currently feel strongly about their respective views, we view the House committee’s action today to be a positive step toward the ultimate resolution of TRIA extension this year.  It could, however, get uglier before it gets nicer,” wrote Joel Wood of the Council of Insurance Agents & Brokers after the vote today. 

Jimi Grande, senior vice president of federal and political affairs at the National Association of Mutual Insurance Companies (NAMIC), was more skeptical.

“We are appreciative of the committee’s willingness to work with stakeholders to reauthorize a program that is essential for protecting the U.S. economy from the potentially devastating effects of a catastrophic terrorist attack,” Grande said. “That said, NAMIC has serious concerns about some of the provisions in the House bill that, if not addressed, could severely curtail some companies’ access to the program and significantly disrupt the currently competitive marketplace for terrorism insurance coverage.”

Please see more  coverage in Carrier ManagementHere’s the link http://www.carriermanagement.com/news/2014/06/20/124852.htm

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.

TRIA renewal teed up in House but legislation sharing the day may put brakes on FSOC

The House Financial Services Committee (HFSC) has a full agenda Thursday, June 19, with a mark up  and likely passage of the Terrorism  Risk Insurance Act Reform Act of 2014, which will extend the program for five years, albeit with an increased co-pay, and higher  program trigger amounts, through Dec. 31, 2019, along with consideration of  bills to slow down and open up to Congressional eyes  the Financial Stability Oversight Council (FSOC).

Housing and Insurance Subcommittee Chairman Randy Neugebauer is introducing the bill before the full committee.

The ease with which the House bill has been accepted, although it is more austere in what is provided for the insurance industry  than the Senate TRIA version, combined with the support for action, likely means the House legislation will sail through with broad Republican support,  until it meets the softer Senate version in conference committee. Then, real tussling could begin.

How the House Democrats will vote on Thursday is said to be a major factor in how the bill moves forward.

If the Democrats on the HFSC are led in a  vote against the TRIA renewal bill, there could be a floor fight. If they vote for it, the bill could go forward on the suspension calendar next week on two-thirds of a vote.

A key question is the Thursday vote of Rep. Carol Maloney, D-NY,  ranking member of the House Financial Services Subcommittee on Capital Markets and GSEs.

Maloney stated in May that raising the program trigger for conventional terrorist events from $100 million to $500 million  and increasing the recoupment of federal payments to 150 percent, which are both features in the Neugebauer bill, “are changes that go far beyond what the market will bear. The economic consequences of these proposed changes to TRIA for metropolitan areas like New York, which continue to be at risk of another attack, would be disastrous.”

However, her office pointed out that since key components have changed, this statement does NOT apply to the current draft.

Another major consideration the industry is concerned about is how  the Congressional Budget Office (CBO) scores the bill, and for how much, given the proposed recoupment level.

Beginning on January 1, 2016, the House bill increases the amount that the Treasury Secretary is required to collect through terrorism loss risk-spreading premiums from 133 to 150 percent of the federal payments made subject to mandatory recoupment. The bill clarifies that the amount of federal payments subject to mandatory recoupment shall be equal to the lesser of the total of federal payments made or the insurance marketplace aggregate retention amount.

But so far the insurance industry is on board to get this bill quickly  through Chairman Jeb Hensarling’s, R-Texas,  committee.

“Any sign of progress is a welcome one,” said Jimi Grande, political affairs senior vice president for the National Association of Mutual Insurance Companies (NAMIC) of the bill that would bifurcate nuclear, biological, chemical or radiological type (NBCR) of attacks from the conventional terrorism trigger amounts.

The American Insurance Association (AIA) praised the growing momentum for TRIA reauthorization in the House but cautioned that certain provisions of the bill could decrease market capacity, citing the bifurcation of conventional terrorism acts with the NBCR attacks. This differentiation “falsely assumes that the insurance market operates based on the same distinctions,” stated AIA president and CEO Leigh Ann Pusey.

Ken Crerar, president and CEO of the Council of Insurance Agents and Brokers (CIAB) stated the organization which represents the largest commercial insurance brokerage firms is “so gratified to see great legislative progress…”

“We hope the Committee and the full House act swiftly so that the Congress can send TRIA legislation to the President for his signature before the August recess,” stated Nat Wienecke, senior vice president, federal government relations at the Property Casualty Insurers Association of America (PCI).

PCI and its member companies applauded what they said were several improvements that have been made in the legislation, including the “reasonable reauthorization duration, maintenance of the “20% insurer deductible,” and incorporation of  “very important technical corrections to the terrorism certification process.”

The Senate bill, S. 2244, contains a seven-year reauthorization and is awaiting a full vote by the Senate.

“We echo the calls of all the key stakeholders for the Financial Services Committee to advance the legislation which has been authored by Chairman Neugebauer. We’re particularly grateful for the Chairman’s decision to seek a five-year extension of the program—just one of many substantive improvements that have been made after close and deliberate consultation with all of the major interests in recent weeks,” Crerar stated.

As Crerar noted, the appropriate federal role in the terrorism insurance marketplace has been debated for 13 years —  and this is the fourth Congressional debate.

There are industry exposure concerns with the House bill but not many were voiced today, in advance of the mark-up.

The House bill increase of trigger amounts to $500 million at the end of five years, can be absorbed by large companies if their coverage as one company does not saturate the marketplace or have too great an area of concentration, but smaller insurers, who may be able to opt out of offering coverage, cannot absorb the higher amounts readily. The tilt in  terrorism risk exposure to only a few, large companies could  skewer the marketplace and raise prices, insurers worry.  And some in the insurance industry remain skeptical of the large co-share or co-pay on top of an already sharply increased trigger amount for federal coverage.

Congress, by and large, wants the industry to fend for itself more in underwriting terrorism risk but almost all of the insurance industry, although conceding the point, says it is not ready to fully expose itself to known and unquantifiable future losses because they are almost impossible now to underwrite and the capacity for full exposure is not there.

With regard to other proposed  insurance reform measures, many in the industry hope that Neugebauer can attach the ‘NARAB II’ legislation to facilitate interstate agent/broker nonresident licensure to the TRIA legislation. NARAB has support from almost all quarters, including the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO.)

The full HFSC will also mark up legislation to place a six-month moratorium on the authority of the FSOC to make financial stability decisions under section 113 of Dodd Frank. Asset managers and mammoth insurer MetLife, which has been under intensive review by the FSOC for almost a year as a systemically important financial institution, have resisted the suggestions that they are systemically risky  the financial markets.

Both the FSOC and the global Financial Stability Board (FSB) have begun examining whether regulated funds or their managers could pose risk to the overall financial system and thus should be deemed SIFIs.

U.S. mutual funds designated as SIFIs would be subject to new, bank-style prudential regulation that could significantly harm funds and the investors who rely upon them. Singling out individual mutual funds for inappropriate regulation or supervision would raise costs for fund investors and distort competition, among other harmful effects, according to the Investment Company Institute Viewpoints blog.

The HSFC will also be marking up H.R. 4387, the FSOC transparency and Accountability Act.

This bill would open up to varying degrees of participation  the FSOC processes to members of Congress, and to the boards and commissions of the agencies that serve on the FSOC, from the Securities and Exchange Commission (SEC)  to the National Credit Union Administration (NCUA.)  It would also make the FSOC subject to both the Sunshine Act and  the Federal Advisory Committee Act. It was introduced by Capital Markets and GSEs Subcommittee Chairman Scott Garrett, R-N.J.

The U.S. Treasury, which houses FSOC, did not comment on the FSOC measures but rarely comments on the particulars of  legislation. Treasury and the Obama Administration have acknowledged their support of TRIA renewal.

“I should add that we, Treasury, applaud the strong bipartisan action by the Senate Banking Committee to preserve the long-term availability and affordability of property and casualty insurance for terrorism risk.  A report of the President’s Working Group on Financial Markets recently affirmed the importance of TRIA to the national economy.  We look forward to swift action by the full Senate and the House to extend the program,” FIO Director Michael McRaith stated in a recent speech in New York this month.

How this will play  out if  the somewhat-hobbling FSOC legislation is attached to the TRIA renewal bill is another story. The next closed FSOC meting is next week, on June 24.

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