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

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

NAIC President Adam Hamm, courtesy NAIC website

NAIC President and ND Commissioner Adam Hamm, courtesy NAIC


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

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

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

Thank you,

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.

Late summer, fall harvest of non-bank SIFIs, G-SIRs (global reinsurers)?

SIR? G-SIR?
It should come as no surprise when MetLife receives a proposed systemically risky financial institution(SIFI) designation when the Financial Stability Oversight Council (FSOC) meets July 31 in a closed session –if the decision is ready, whether or not people agree with it.
At least one other institution in consideration for a nonbank SIFI designation will also be discussed at the scheduled meeting, it appears from the FSOC notice.
There was a nonbank SIFI in Stage 2 (out of 3 stages before a designation is proposed) in late March, which could be a reinsurer like the behemoth Berkshire Hathaway, or an asset manager, like BlackRock, which also early on (2011) argued against its sector’s consideration by the FSOC. Yet, because the FSOC minutes show that the deputy director for financial stability in the Federal Insurance Office (FIO) provided an update on the status of the ongoing analysis of this nonbank financial company in Stage 2, a insurer or reinsurer could be under the microscope–although it could be an asset manager that owns an annuity company. Berkshire is expected by some to be named, along with other global reinsurers, a global systemically important reinsurer (G-SIR) in November by the Financial Stability Board. (FSB.)
For its part, MetLife has been meeting with Federal Reserve Board officials for at least two years as they have noted in presentations and filings, regulators and lawmakers have requested input on capital adequacy frameworks for insurers as an alternative to the Basel framework prescribed under the US Basel III final rule. met has been under consideration as a SIFI in stage 3 analysis for more than a year by the FSOC, where it came under review when it divested its bank holding company status. As such, it has been very familiar with Federal Reserve oversight and the onus of stress tests. Insurance-applicable capital standards have yet to be developed. All SIFIs will be subject to Basel III, and insurers are hoping for some insurance-centric adaptation.
What will be interesting, once the MetLife decision is released, will be the rationale used for determining MetLife’s proposed SIFI-hood, and the language of the dissent or dissents which could follow.

If a run on the bank scenario is not used as the starting culprit in the FSOC analysis, MetLife would still have to be shown to cause systemic risk in a failure if it were a SIFI. Its global position and leveraging, and enormous third party asset management arm, MetLife Investment Management, could conceivably be argued to cause  any systemic risk problem more than the insurance operations. According to a snapshot profile, it it manages 12 accounts totaling an estimated $12.3 billion of assets under management with approximately 11 to 25 clients. It purchases commercial real estate. Asset managers are already being explored for their systemic risk. 

There is a strong and lively camp that resolutely believes insurers are just not systemically risky. There are bills in the House, two approved by a panel, that would curtail FSOC’s SIFI designation process pending a review, allow certain members Congress and other agency officials to sit in on closed meetings,  and new efforts  this week to reform FSOC and the Office of Financial lResearch  introduced by U.S. Rep. Dennis Ross, R-Fla., Rep. John Delaney, D-Md, Spencer Bachus, R-AL., Kyrsten Sinema, D-Az.,  and Patrick Murphy, D-Fla.,

“Dodd-Frank turned four this week,” Ross stated.  Unfortunately, it has become increasingly evident that aspects of the law are not working as promised. FSOC and OFR are agencies that were established to identify potential risks to our nation’s financial stability but they have been broadly criticized for their lack of transparency, flawed research, and inadequate designation process. …. In many cases, the SIFI designation can lead to a large cost increase for consumers.” Ross and fellow concerned House members  wrote a letter to Secretary  of the Treasury Jacob Lew in April detailing concerns with judging asset managers as risky and suggesting the need for specific ways in how they pose risk.

All of this concern, FSOC hand-wringing and legislation will come too late for MetLife, at least.

The rationale used for the case to create Prudential Financial’s SIFI designation was pummeled by many, including the insurance contingent on the FSOC, excepting Treasury official and FIO Director Michael McRaith, a nonvoting member. The run-on-the-bank scenario was held as improbable, and FSOC insurance expertise member Roy Woodall also worried about how the insurer could possibly ever exit from SIFI-hood under the scenario offered. FSOC began its examination from an assumption that Prudential was in distress from a run on the bank.  Woodall dissented on Prudential’s SIFI designation, but not on AIG‘s.

“The Basis does not establish that any individual counterparty would be materially impaired because of losses resulting from exposure to Prudential. Instead, the Basis relies on broader market effects and aggregates the relatively small individual exposures to conclude that exposures across multiple markets and financial products are significant enough that material financial distress at Prudential could contribute to a material impairment in the functioning of key financial markets,” Woodall stated in his dissent.

Treasury officials were concerned about Prudential’s extensive derivatives portfolio and activities for hedging and otherwise.

The majority FSOC rationale offered for MetLife is likely to be a bit different, but invite still find criticism.
Prudential was officially designated by the FSOC on Sept. 19, 2013 after an appeal failed, and as such is subject to enhanced supervision by the FRB pursuant to Dodd-Frank.
Prudential states outright in its resolution plan filed with the Fed “the failure of the Company would not have serious adverse effects on the financial stability of the United States.”
Prudential is also subject to regulation as an insurance holding company in the states where Prudential’s U.S. insurance company material legal entities are domiciled, which currently include New Jersey, Arizona and Connecticut.
There are no capital or enhanced standards or Basel 3 adaptations worked out yet for Prudential, which is being overseen by the Boston Fed. The company says it will continue to work with the regulators to develop policies and standards that are appropriate for the insurance industry.
Its first order of business was filing a resolution plan, which it did just before the July 1 deadline. AIG also had to do one, and MetLife will have to do one as well.
The Resolution Plan describes potential sales and dispositions of material assets, business lines, and legal entities, and/or the run-off of certain businesses that could occur, as necessary, during the hypothetical resolution scenario.
Pru’s resolution plan describes potential asset or business sales that could occur during this hypothetical resolution of Prudential and its material legal entities as the result of the hypothetical stress event.
Prudential says that Under the hypothetical resolution scenario, each of Prudential Financial, Prudential Asset Management Holding Co., the holding company of Prudential’s asset management business, and (Prudential Global Funding (PGF, its central derivatives conduit) would voluntarily commence a bankruptcy proceeding under Chapter 11 of the Bankruptcy Code in the applicable federal court.
Once the Chapter 11 proceeding began, PFI and PAMHC would likely sell certain businesses and reorganize around the businesses each elects to retain.
PGF, Prudential’s central derivatives conduit, would quickly liquidate what limited assets would remain and settle any other liabilities following the termination and closing out of its derivatives positions, Pru’s resolution plan states.
Under the hypothetical resolution scenario, each of the primary insurance regulators for the insurance subsidiaries would file uncontested orders to start rehabilitation proceedings against the relevant insurer material legal entities in their respective states of domicile.
MetLife, which has more extensive global businesses than Prudential, which concentrates its overseas business in Japan, would have to include these in a resolution plan.
MetLife would have 30 days to request a hearing, which then must happen in another 30 days, once it is notified of FSOC’s initial decision. Without a request, a final determination is made by FSOC within 10 days.

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.

FSOC annual report testimony on Hill Tues., while FSOC eyeing Stage 2 nonbank, meets in closed session

The Financial Stability Oversight Council (FSOC) will have a busy day Tuesday, June 24, as it meets in a closed, executive session and as Treasury Secretary Jack Lew testified before the House Financial Services Committee (HFSC)  on a hearing  entitled “The Annual Report of the Financial Stability Oversight Council.” Lew will be the only witness.

Although insurance is a subset of FSOC’s realm and of its annual report, there may be questions  from lawmakers on  the prudential regulation by the Federal Reserve of large insurers and asset managers, discussion on the application of domestic and proposed international capital standards and on FSOC’s internal business. HFSC passed measures last week on party line voting, to try and put the brakes on FSOC’s designation process and open it up to more federal officials and Congress.

MetLife is still in stage 3 of its potential designation as a nonbank systemically important financial institution (SIFI.) However, according to a readout of the March 27 FSOC meeting, which was closed, there was a discussion in late March on not only a stage potential designee but also a stage 2 financial company.

MetLife has already acknowledged it is in stage 3 and discussions are likely to continue Tuesday.  Of interest, the company, now stage 2 analysis, is perhaps an insurer or reinsurer.

Although the minutes did not disclose the sector, presentations on the unidentified  company were given by John Nolan, deputy director for Financial Stability in the Federal Insurance Office (FIO), who provided an update on the status of the ongoing analysis of the company. Randall Dodd, senior policy advisor at FIO, Todd Cohen, policy advisor at Treasury; and Scott Alvarez, General Counsel of the Federal Reserve, were available to answer questions on the company. However, the minutes do not reflect any presentation made by the office of the FSOC voting  member with Insurance Expertise, so it could be FIO’s and the Fed’s take on an asset manager with insurance holdings, or perhaps a large reinsurer.

The Financial Stability Board, in concert with the International Association of Insurance Supervisors (IAIS)  is coming out with its reinsurance global systemically important insurers (G-SIIs) around November of this year.  As far as domestics, Berkshire Hathaway could  possibly be among them because of its size, although the percentage of insurance as part of Berkshire Hathaway may not meet specific FSOC threshold material for insurance companies.

The annual report for 2014 again discussed again interest rate risk for insurance companies:

“Despite a significant rise in longer-term interest rates this past year, the insurance industry continued to report investment margins that were below historic averages,” the annual report of FSOC stated.

“If historically low interest rates persist, insurance companies could face a challenge generating investment returns that are sufficient to meet the cash flow demands of liabilities,” the report continued. Interest rates remained well below historical averages and continued to weigh on life insurance investment yields.

Legacy products in particular (including annuities, long-term care, and universal life insurance with secondary guarantees) have been less profitable in the current interest rate environment, as they were originally priced and sold under differing market conditions, as insurers have found out, the report noted.

The current low interest rate environment also may affect the use of captive reinsurance: the low rates affect the present value of insurers’ contract obligations (increasing the present values

of future obligations), and therefore may encourage use of reinsurance for insurance products with liability valuations that are interest-rate-sensitive

FSOC recommends that the Federal Insurance Office (FIO) and state insurance regulators continue to monitor and assess interest rate risk resulting from severe interest rate shocks.

FSOC also reported that Life insurance revenue from insurance and annuity products decreased to $583 billion in 2013 from the record $645 billion set in 2012.

Although  Expanded product distribution channels and a more favorable interest rate environment led to higher fixed annuity sales,  a number of one- time transactions and increased reinsurance cession overcame the improved fixed annuity sales and led to the decrease in total revenues.

Life insurers’ average portfolio yields continued to decline in 2013, but at a slower rate than in 2012, the report stated. Nonetheless, the life insurance sector’s net income rose 6.8% to $41 billion, a record high, benefitting from rising equity markets.

FSOC also delved into concerns regarding captive reinsurance. It pointed out that regulators and rating agencies have noted that the broad use of captive reinsurance by life insurers may result in regulatory capital ratios that potentially understate risk.

During times of financial market volatility when reserve and capital levels for some products should increase, an insurance company that uses captive reinsurance may not be required to hold higher reserves and capital. This could become a financial stability concern if a large, complex insurance organization were to experience financial distress,” the annual report stated.

The concerns have some offsets: The implementation of principles-based reserving (PBR) by the states  may eliminate the need to use captive reinsurance for the purpose of reducing reserves that are significantly higher than expected losses, according to the report.

The Federal Reserve  issued a “Supervision and Regulation Letter” (SRL)  in December 2013 concerning the effects of risk transfer activities on capital adequacy, which would apply to captive reinsurance risk transfer transactions for insurance companies it supervises when they become subject to the Federal Reserve’s risk-based capital framework.

The FIO is still monitoring both the role and impact of captives in the sector and the potential for regulatory improvements at the state level, as well.

Property/Casualty sector revenue from insurance products increased 3.9% to $544 billion in 2013, a record high.

Rates charged by insurers to policyholders increased moderately in most commercial lines of P/C business led by strong sales of workers’ compensation and demand for personal auto insurance. Net income increased to a record level of $70 billion, or an increase of 91.5% from 2012, as expenses and losses paid on claims declined and there were no major storms during the hurricane season in 2013, the annual report stated.

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.

Gov’t OIG audit: FIO has been busy, but needs to track work, meet deadlines

The Federal Insurance Office (FIO) should keep records and create a plan for its functions and operations, as well as mid its report deadlines, according to the Office of the Inspector General (OIG).

The audit offered insight into why the reports have been months late, into the focus of FIO to date, and into its apparent shortcomings in tracking its own activities.

Four of the five reports required by the 2010 Dodd-Frank Act were completed well after their due dates, from about 10 to 23 months, and the fifth one, on global reinsurance,  which was due Sept. 30, 2012, has not yet been completed, the report noted.

In addition, FIO hasn’t yet documented a strategy for accomplishing its legislative functions, or developed a comprehensive implementation plan to direct the development of operational processes and ensure critical deliverables are met, the May 14 report stated.

Thus, in the future, FIO will be timely of future reports document its priorities and implementation plan, provide for record keeping, and develop performance measures, according to the audit report’s agreement reached with the Treasury office.

According to FIO management, the reasons that FIO missed the required deadlines vary, the report stated. As expected, the modernization report went through many drafts: “FIO management told us that the insurance industry modernization report was highly anticipated by the insurance industry, and the report underwent an extensive review process to ensure that the information and recommendations contained within the report were not misinterpreted.”

Much of this review process was outside the hands of FIO, some have related. FIO had key drafts done months in advance of their final publishing date, but  reports went through a tough multi-agency vetting process.

FIO officials told the OIG auditor that the global reinsurance report has been delayed while FIO focuses resources on drafting a higher priority report by the President’s Working Group on the availability and affordability of insurance for terrorism risk.

According to Treasury officials, FIO’s primary operational focus to date, the report stated, has been on representing U.S. interests in international insurance matters and working to establish strategic relationships within the insurance industry.

FIO management also were reported to have stated that the delays were due, in large part, to the considerable amount of time required to identify, attract, and hire staff with the knowledge and experience in several areas of insurance regulation needed to perform its work relating to the reports.

Some in Congress have asked McRaith, referencing overdue or late reports, chief among them, the almost two-year overdue report on Financial Modernization, if his office is adequate for the needs of preparing the statutorily-required reports on time.

In this audit report, the OIG was told by an official that the  FIO staff of 15 was determined by using the human capital planning approach which apparently identified the purposes of the office, the skills required for the office, and the skills already available.

However, “FIO was unable to provide us with a copy of this analysis,” the auditor stated.

According to this official, once FIO reaches15 full time employees, an assessment will be made to further evaluate the sufficiency of the staff size, the report said.

The Dodd-Frank Act required FIO to issue five reports, of which two reports are an annual requirement and three reports were a one-time requirement. Four of the required reports, including both initial annual reports, were completed well after their due dates, and the other one has not yet been completed.

The audit report did find that FIO has engaged in numerous activities such as representing U.S. interests related to international insurance matters, worked to establish strategic relationships within the insurance sector, staffed the office, and drafted reports.
Although FIO has worked to develop the European Union- U.S. Insurance Regulatory Dialogue, participated in the U.S.–China Strategic and Economic Dialogue, is building relationships within the domestic insurance sector and has provided a forum for the discussion of insurance topics within the federal government and the insurance sector, the audit found that FIO was unable to provide formal documentation to support the extent of its involvement in such activities.

“We believe that FIO needs to maintain a more complete record of the material activities performed by the office and their results to provide for greater transparency and to conform to Treasury’s record policy,” the OIG report said.

However, the main audit objective was to evaluate the status and effectiveness of Treasury’s process to establish FIO in a way that enables it to perform its functions. Image

In a polite written response, the tone of both the audit report and the letters back, FIO Director Michael McRaith said it agreed with the recommendations and is taking steps to implement them by working to finish the global reinsurance report “with deliberate speed.”

McRaith wrote May 1 in a letter to James Lisle, Jr, the OIG auditor, a CPA, that FIO has built an office of 15 staff and increasingly serves a a resource of insurance expertise not only within Treasury but also for third parties, including the GAO, the Financial Stability Oversight Council (FSOC) and members of Congress.

McRaith wrote that FIO agreed with the recommendations and will document FIO’s priorities and implementation plan, undertake record-keeping and develop performance measures to document the office’s progress.

The auditor also stated that FIO must put the estimated dates for completing corrective actions in the Joint Audit Management Enterprise System (JAMES), Treasury’s audit recommendation tracking system.

Reference for audit: OIG-14-036; Treasury Made Progress to Stand Up the Federal Insurance Office, But Missed Reporting Deadlines

Photo:  A statue of Abraham Alfonse Albert Gallatin, the longest-serving Treasury Secretary (1801-1813) presides over Treasury’s section of Pennsylvania Avenue, NW

Author, Photo: Liz Festa