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The Changing Face of Financial Regulation Reform

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While critics of the omnibus financial services reform legislation that the House passed last week complain it imposes “bank-centric” regulation on insurers and agents, analysts say the impact will be manageable and there were no last-minute surprises.

At the same time, the American Council of Life Insurers cautions that the bill leaves several important life insurance industry issues to be addressed through a formal rulemaking process, adding, “We will not have a complete picture of the impact of the legislation until that process is complete.”

Jeff Schuman, a life analyst at Keefe Bruyette Woods in Hartford, noted that life insurers have never been a primary target of the regulatory reform effort.

“It’s been a blessing that no one was explicitly gunning for the industry or felt the need to dramatically change the industry,” Schuman said. “But it’s also been a curse in the sense that it’s been hard for the industry to help shape the outcome of a bank-centric debate.”

The ACLI agreed. “The final legislation reflects a bank-centered approach to regulation that does not always mesh well with the life insurance industry, our existing regulatory structure and the way we address consumer needs,” it said.

Schuman said the legislation–H. 4173, also known as the Dodd-Frank Financial Services Reform Bill–has shaped up as expected, even though conferees crafting the final version of the legislation imposed a tax on large financial institutions to pay for the bill at the last moment that left some Republicans angry and uncertain to provide key support to the bill.

The provision was removed early last week in response to concerns voiced by Republicans whose support was necessary to get the 60 votes necessary to pass the bill. Instead, part of the $19 billion needed to pay for the bill over five years was raised by increasing deposit insurance fees on banks. The remainder was attained by ending the Troubled Asset Relief Program before its scheduled Oct. 3 termination date.

The legislation will create a Federal Insurance Office with the authority to coordinate with the U.S. Trade Representative in negotiating bilateral trade agreements on insurance with foreign countries that preempt inconsistent state laws. The office will have no regulatory authority, but it will have the power to monitor all activities related to the business of insurance except for health insurance and long-term care insurance. That power will rest with the Department of Health and Human Services.

The final language also mandates that the Treasury Department conduct a study of insurance regulation and make recommendations to Congress within 18 months. The House also added a provision to the study requiring that the study include recommendations on the U.S. and global reinsurance markets.

In a statement to the National Underwriter last week, Rep. Henry Waxman, D-Calif., chairman of the House Energy and Commerce Committee and sponsor of the provision dealing with long-term care insurance, clarified the purpose of his amendment.

He said his amendment excludes long-term care insurance from the scope of the new Federal Insurance Office, with the exception of those products dealing with an annuity or life insurance component.

Rep. Waxman explained that HHS “has experience and expertise in long-term care matters, and my amendment reflects the view that it makes sense for HHS, not the Treasury Department, to take the lead in studying long-term care insurance.”

The bill also contains a provision overhauling regulation of the surplus lines and reinsurance industries.

Negotiators also agreed during final talks to a key industry request that the resolution authority to be created to wind down systemically risky financial firms will not be prefunded.

The ACLI explained that, although life insurers may be subject to assessments following a financial company’s resolution under the new federal authority, it is unclear to what extent they will be affected by those assessments.

In addition, the ACLI said, the new law makes clear that insurance company insolvencies will continue to be resolved under state law.

The FDIC could only step in to wind down a systemically important insurance company if the insurance commissioner where the insurer is domiciled fails to take appropriate actions. “We believe this scenario is highly unlikely,” the ACLI said.

A provision was also added to the bill that creates a Financial Services Oversight Council to oversee large, potentially systemically risky financial institutions that adds two non-voting members: a representative from the FIO and a state insurance regulator.

Life insurers did win certain carve-outs that allow them some flexibility in dealing with the so-called “Volcker rule,” which proposes to severely limit investment activities conducted by insurers that own banks or thrifts.

The bill contains language providing flexibility for trading activities insurers conduct in their general investment account as long as these activities are conducted in accordance with state insurance investment regulations, or are done on behalf of customers, i.e. through separate accounts–accounts segregated from funds in insurers’ general accounts.

That provision does provide federal regulators with authority to limit these activities if they determine they are “overly broad,” one insurance industry official said.

Another provision specifically exempts insurers from the so-called Volcker rule if they conduct activities in a trust bank that does not take deposits from the public, does not providing checking or savings accounts, and does not borrow from the Federal Reserve Board to finance its activities.

On derivatives, the bill imposes new capital and margin requirements and require many derivatives to be traded on exchanges and cleared through clearinghouses.

The ACLI cautions that the final bill assigns the Securities and Exchange Commission and the Commodity Futures Trading Commission the authority to address the industry’s key concerns, such as the clearinghouse requirement (whether insurers’ swap activities must be traded through a clearinghouse or exchange) and the definitions of “swap participant” and “major swap participant.”

In a statement, the ACLI said it is “confident” it can make a strong case to the SEC and CFTC on how life insurers use derivatives to reduce risk and why we should be excluded from the definitions of “swap participant” and “major swap participant.”


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