New FED Standards May Impact Life Insurers

The Fed proposal, published for comment Tuesday, involves steps the Fed is required to take under the Dodd-Frank financial services reform law to strengthen regulation and supervision of large bank holding companies and systemically important nonbank financial firms.

The proposal includes a wide range of measures addressing issues such as capital, liquidity, credit exposure, stress testing, risk management, and early remediation requirements.

Nadel’s view is that if the proposal doesn’t address the differences between banks and insures measuring the risks and appropriate capital levels for life insurers using bank regulatory capital standards “would essentially ignore the business models and create a completely uneven competitive environment within the life insurance industry for those designated nonbank covered companies and those excluded from the Fed’s purview.”

Nadel added that if the same standards are adopted for insurers designated as SIFI as those banks with the same designation, it would lead to “celebrations” at companies like New York Life and Massachusetts Mutual “if key competitors such as MetLife and Prudential simply can no longer price competitively in certain product lines because their capital requirements are higher for the same risk.”

Specifically, Nadel said the proposed counterparty exposure limits are of particular concern.

He said that given the significant exposure to variable annuities and related hedging; and “what appears to be a constant reduction in available counterparties willing to underwrite the other side of the hedge, we are somewhat concerned by the proposed single-counterparty limits set forth in the document where in most instances single-counterparty exposure would be limited to 25 percent of capital.”

“We need to do more work on this subject, but assuming the VA business continues to grow at a reasonable pace over time, this could pose a threat to hedging programs for nonbank covered companies,” Nagel warns.

“We note, too, that VA’s are the logical product set on which to focus; however, we note the counterparty category includes extensions of credit (including loans, deposits, and lines of credit), securities lending, as well as other exposures.”

He said the proposal also sets a stricter 10% limit for credit exposure between a covered company and a counterparty that each either have $500b+ in consolidated assets or are both nonbank covered companies.