Industry Braces for FSOC Vote on SIFI Criteria

In a investment note late last year, John Nadel of Sterne Agee, New York said that if the proposal doesn’t address the differences between banks and insurers 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 based in a proposal published for comment by the Fed last year, insurers designated as systemically significant would be subject to the same capital standards as banks under a proposed framework.

 For example, he said that counterparty limits the proposal would impose could make insurers designated as Systemically Important Financial Institutions (SIFI) in key business areas, like the sale of variable annuities. He also cited limits on credit exposures that could make life insurance SIFIs non-competitive with their non-SIFI life insurer counterparts.

The American Council of Life Insurers declined comment.

But, in a comment letter last December, ACLI officials said that a careful analysis by the FSOC will show that the traditional, core activities of life insurance companies do not present systemic risk.”