Applying the new Dodd-Frank Wall Street Reform and Consumer Protection Act derivatives rules to life insurers could limit those insurers’ financial flexibility, a ratings analyst says.
Weigang Bo, an associate analyst at Moody’s Investors Service, New York, looks at the possible effects of Dodd-Frank Act swaps provisions on U.S. life insurers in a new commentary.
The Dodd-Frank Act is supposed to impose new capital, clearing and reporting requirements on swaps transactions, in an effort to keep swaps players from creating financial houses of cards out of regulators’ sight.
Life insurers have argued that they use swaps in a fashion that usually helps reduce systemic risk, rather than increasing it, and that they ought to get an “end user” exemption from swaps requirements aimed mainly at swaps traders and speculators.
The Commodity Futures Trading Commission (CFTC) recently delayed the effective date of the swaps rules to as late as year end, from the original effective date of July 16, and that should give insurers and regulators more time to develop an end user exemption for insurers, Bo writes in the Moody’s commentary.
“US life insurers are big users of swaps to manage their asset/liability risks and to hedge products with long-term guarantees, such as variable annuity products with lifetime income or withdrawal benefits,” Bo says.