For insurers, the standard financial distress plan ought to be to turn to the state insurance insolvency system, according to the American Council of Life Insurers (ACLI).
David Leifer, a vice president at the ACLI, Washington, makes the case for a “call the state insurance regulators” approach in a comment letter on a rule proposed by the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve Board. The FDIC and the Fed have suggested in the proposed rule that each large, systemically significant, nonbank financial company that they regulate ought to submit an annual “resolution report,” or “living will,” explaining how its operations could be shut down in a quick, orderly way if the company ran into trouble.
The FDIC and the Fed are drafting the rule to implement Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The ACLI does not believe that the traditional core activities of a life insurer lead to systemic risk, Leifer writes in the ACLI comment letter.
If any insurer, including a systemically important insurer, does run into trouble, then state insurance insolvency laws should apply, Leifer says.
Insurers already are subject to mandatory liquidation procedures under state law, and those procedures are much different than the Bankruptcy Code liquidation procedures that apply to other types of financial companies, Leifer says.
“We believe the present system has proven its ability to handle the simultaneous insolvencies of several major life insurers plus a number of failures involving middle-tier and smaller companies,” Leifer says. “Accordingly, it is our position that regulated entities (such as insurance companies) that are ineligible for Bankruptcy Code protection but are subject to an established compulsory insolvency regime should be deemed to meet the resolution planning requirement of Section 165(d) by certifying the applicability of such a regime.”
An insurer should be able to satisfy any resolution report requirements by simply telling the FDIC that, if it needs help, it will submit itself to rehabilitation or liquidation under applicable state insurance insolvency laws, Leifer says.
“This can be accomplished in either instance through appropriate coordination with state insurance regulators,” Leifer says.
Leifer notes that a Dodd-Frank Act Resolution Working Group at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., is studying the changes in state laws that might be necessary to implement the Dodd-Frank Act Orderly Resolution Authority provisions. The FDIC should work with state regulators when looking at the implications of Orderly Resolution Authority for insurers, he says.
Federal regulators also ought to take care to coordinate work on resolution of international companies with the work of regulators in other countries, Leifer says.