Close Close

Life Health > Life Insurance

FSOC: A Giant Comes to Life

Your article was successfully shared with the contacts you provided.

WASHINGTON BUREAU — The Financial Stability Oversight Council (FSOC) has given insurance industry groups plenty to think about with new systemic risk draft regulations, a major Volcker Rule study, and a lingering voting insurance seat vacancy.

Congress brought the FSOC to life with a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act. The council, an arm of the U.S. Treasury Department, is supposed to track the kinds of trends and events that could threaten the stability of the U.S. financial system.

The chairman is Treasury Secretary Timothy Geithner. Most of the other voting members are heads of federal financial services regulatory agencies, such as the Federal Reserve Board and the Federal Deposit Insurance Corp. The council is supposed to include a voting insurance member to be nominated by the president and confirmed by the Senate, and the head of the new Federal Insurance Office (FIO), another Treasury Department arm created by the Dodd-Frank Act.

The FSOC is still missing the voting insurance member and the FIO director.

At the first two monthly meetings, the FSOC focused mainly on organizational matters, such as adopting by-laws, a transparency policy and a committee structure. The major regulatory filings had to do with “systemically important financial market utilities” and an “advanced notice of proposed rulemaking” (ANPR), or set of questions for commenters, concerning how the FSOC might go about regulating “nonbank financial companies” such as insurance companies and broker-dealers.

At the meeting held Tuesday, the FSOC members began talking about concentration of risk, curbs on speculative trading, and regulation of systemically important nonbank financial companies in more specific terms.


One major document the FSOC has unveiled is a notice of proposed rulemaking, or draft regulation, implementing Section 113 of the Dodd-Frank Act.

Section 113 of the act gives the FSOC the authority to require that a nonbank financial company be supervised by the Federal Reserve Board if it thinks the company is large enough, interconnected enough, or important enough in other ways that problems at the company could threaten the financial stability of the United States.

At the FSOC meeting Tuesday, the FSOC staff gave a summary of comments submitted in response to the nonbank financial company ANPR.

Missouri Insurance Director John Huff, who is serving on the FSOC as a non-voting representative of the National Association of Insurance Commissioners, Kansas City, Mo., asked what the implications would be for a nonbank financial institution that is “designated under Section 113.”

The FSOC staff said a designated company would be subject to consolidated supervision by the Fed regardless of whether the company owned a bank or not.

Fed Chairman Ben Bernanke asked about coordination at the international level.

Discussions have been taking place with international bodies with regard to both banks and nonbanks, but the FSOC discussion has been focused more on nonbanks, according to the FSOC staff.


The FSOC also released a study on implementing the Volcker Report .

The Volcker Rule, created by Section 619 of the Dodd-Frank Act, is supposed to limit the ability of systemically important, federally insured banks and other systemically important financial companies that benefit from federal backing from using that support to engage in speculative trading or invest in hedge funds or private equity funds.

The rule applies to systemically important insurers that have bank subsidiaries or access to the Fed discount window. A key exception, or “permitted activity,” states that the Volcker Rule prohibitions do not apply to an investment activity conducted by an insurance company for its insurance business if state insurance regulators allow the activity.

The exception does not apply to investments for third-party customers outside insurance contracts, and regulators can limit use of the exception, if necessary, to protect the safety and soundness of the financial institution or the financial stability of the United States.

In the report released Tuesday, the FSOC has proposed that federal agencies be urged to consult “relevant” state insurance commissioners with respect to the definitions of terms such as “regulated insurance company,” “business of insurance,” and “general account” that are part of the permitted activity exception. The FSOC also urges federal agencies to use the definition of “business of insurance” developed in case law arising from the McCarran-Ferguson Act.

The FSOC does not appear to say whether it believes federal agencies can establish a regulatory exception from the Volcker Rule for separate account trading activity. The FSOC instead urges the agencies to weigh the benefits of such an exception against the potential for “gaming.”

“For nonbank financial companies that are supervised by the [Federal Reserve] Board, the Volcker Rule does not expressly prohibit or limit any activities,” FSOC officials say in the Volcker Rule study. “Instead, the Volcker Rule requires that the Board adopt rules imposing additional capital charges or other restrictions on such companies to address the risks and conflicts of interest that the Volcker Rule was designed to address.”

Analysts at groups such as the American Council of Life Insurers (ACLI), Washington, and the American Insurance Association (AIA), Washington, are just starting the process of sifting through the study.

“We look forward to analyzing the report released today FSOC and discussing its potential implications with our member companies,” ACLI representative Whit Cornman says.

At the AIA, “we are currently reviewing both the Section 113 [notice of proposed rulemaking] and the Volker Rule study for implications for the property-casualty insurance industry,” says Blain Rethmeier, a senior vice president at the AIA. “At the appropriate time, we will share our views with the FSOC.”


The Property Casualty Insurers Association of America (PCI), Des Plaines, Ill., has been asking the Obama administration to work quickly to appoint the voting insurance member of the FSOC.

The ACLI is pleased that Huff has been appointed to a seat on the FSOC, Cornman says.

“However, we hope that the president will soon nominate the head of the Federal Insurance Office and the voting member with insurance expertise,” Cornman says. “Being state-regulated, the insurance industry is not always well understood on the federal level. With issues of great interest to the industry now being discussed, it is all the more important that the appointments be made promptly.