The American Council of Life Insurers (ACLI) wants a guide state insurance regulators will use to handle failures of systemically important insurers to convey a need for quick decision making.
The Dodd-Frank Receivership Implementation Working Group at the National Association of Insurance Commissioners (NAIC), Kansas City, Mo., is developing a draft chapter on implementing a receivership for the kind of large insurer, or smaller insurer that somehow affects the solvency of other financial institutions, that could be affected by the Orderly Liquidation Authority (OLA) provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The Dodd-Frank Act gives federal reglators the authority to determine whether an insurer is systemically important.
If federal regulators decide that a systemically important insurer is distressed, the Dodd-Frank Act will give regulators in the distressed insurer’s state of domicile, or official home state, 60 days to resolve the insurer’s problems. If the state regulators do not resolve the insurer within 60 days, the Federal Deposit Insurance Corp. (FDIC) can step in and resolve the insurer using the state of domicile’s insolvency laws.
The Dodd-Frank receivership working group is drafting a new Dodd-Frank Act chapter for the NAIC’s Receiver’s Handbook for Insurance Company Insolvencies.
The table of contents for the current version includes topics such as the state-level process for prompt initiation of state insurance receivership, the need to analyze what could go wrong and how to handle various types of emergencies before a crisis occurs, procedures for consulting promptly with a state’s attorney general or other stakeholders, and issues involving an insurer’s subsidiaries and affiliates.
One flow chart in the draft illustrates the steps for initiating orderly liquidation proceedings under the Dodd-Frank Act.
Another chart illustrates how a state would go about initiating the receivership process.
The working group has been talking about matters such as how state regulators should go about monitoring federally regulated entities related to insurers before obvious problems crop up. Another issue that has surfaced is the idea of trying to reduce the likelihood that judicial intervention could interfere with efforts to deal with a financial emergency at a systemically important insurer.
David Leifer, an associate general counsel at the ACLI, Washington, and Wayne Mehlman, a senior counsel at the ACLI, write in a comment letter that they like the handbook chapter draft, believe it is well-written and believe it reinforces the role that state receivership laws would play in any insurer resolution involving the Dodd-Frank Act.
“It is our position that distressed insurance entities regardless of size or designation are best left to the supervision of appropriate state regulators pursuant to long established state supervision and receivership laws,” Leifer and Mehlman say. “Execution and implementation, though, will necessarily be left in the hands of individual regulators. To this end, we urge the NAIC to infuse the draft chapter with an anticipation of the sense of urgency that will inevitably accompany any designation of a large insurance entity once it has been determined to be distressed.”
Any crisis similar to the credit market freeze that hit in 2008 “is unlikely to accommodate careful deliberation and time-consuming coordination among regulators,” the ACLI reps say. “Rather, events will dictate that decisions be made quickly and by those most familiar with the circumstances of the entity in question.”
The FDIC should defer to state insurance regulators whenever possible, and state insurance regulators should take meaningful steps to prepare for an OLA event as far in advance as possible, the ACLI reps say.
The ACLI reps note that the FDIC appears to have the authority to liquidate the non-insurance subsidiaries of distressed, systemically important insurers.
“Insurance regulators should be urged to be proactive in educating federal regulators about the negative financial implications of possibly liquidating or putting liens on such subsidiaries since it may undermine the financial stability of the parent insurance company,” the ACLI reps say.