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NAIC's McCarty and FSOC's Huff Weigh in on FSOC Final Rule for SIFIs

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The National Association of Insurance Commissioners (NAIC) has weighed in on the final rule issued by the Financial Stability Oversight Council (FSOC) on April 3 by noting that insurance isn’t a natural fit for a SIFI but that it was glad to state insurance regulators would be involved in the process.

The extent to which they will be involved remains to be seen, but a quick scan of the final rule did not overly-emphasize their expected involvement— states of domicile, nor commissioners, nor the NAIC are mentioned, per se, in the final rule.

However, ”supervisory agency,” is from the rule on designations  of financial market utilities (FMUs,) not nonbank financial companies. For nonbanks, the relevant term is “primary financial regulatory agency,” which is defined in the statute and in the text to include, in certain circumstances, state insurance regulator, not nonbank financial companies, according to a Treasury spokesman. For nonbanks, the relevant term is “primary financial regulatory agency,” which is defined in the statute and in the text to include, in certain circumstances, state insurance regulator, he noted.

The rule outlines the FSOC’s authority and the process and metrics it will use to designate by the end of the year various non-bank financial companies as systemically important financial institutions (SIFIs).

The SIFI designation is intended to allow for enhanced supervision and regulation by the Federal Reserve. See: //

“While I continue to believe that traditional insurance activities are not systemically risky, I am pleased that they appreciate the importance of meaningful consultation with state insurance regulators in its designation process,” said NAIC President and Florida Insurance Commissioner Kevin McCarty.

Section 804 of the Dodd-Frank Act grants the FSOC the authority to designate an FMU that the Council determines is or is likely to become systemically important because the failure of or a disruption to the functioning of the company could create, or increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and thereby threaten the stability of the U.S. financial system.

The 52-page final rule refers to consultation with one or more supervisory agencies but appears to define Supervisory Agency that is not a state regulator, per se.

However, FSOC is supposed to coordinate with supervising bodies of information and data collection, if necessary, as it makes its determinations.

“It looks to me like the state insurance regulators are second-class citizens in comparison to their federal banking counterparts (but so are state securities and banking regulators, apparently,” said an insurance lawyer who reviewed the final rule.

 Adequate consultation with state insurance regulators has long been a concern of the NAIC. Regulators had previously indicated at the end of 2011 that they “have quite a bit of information to contribute to the process including examination and analysis reports, asset/liability modeling results, asset adequacy analyses, group holding company information, and a world-leading database of information about each insurance company.”

“While we recognize the Council has three insurance experts, including Director Huff, there is no substitute for the insights that a company’s own regulator can provide,” continued McCarty in a statement after the FSOC final rule was released.

“Their knowledge and advice can benefit the FSOC as it analyzes companies for potential designation, and we expect that the consultation with state regulators will be robust, meaningful, and timely. We look forward to working with the members of the Council as they move forward with this important work,” he stated.

Director of the Missouri Department of Insurance, Financial Institutions and Professional Registration John M. Huff, who serves as a non-voting member of the FSOC on behalf of state insurance regulators stated that the SIFI designation should not be “taken lightly.”

“…the decision on whether to designate a non-bank financial company has significant implications for a company and its regulation, as well as the financial system as a whole,” Huff stated.

When FSOC issued a second notice of proposed rulemaking and proposed interpretative guidance,  Huff solicited comments from his fellow state insurance regulators and there was a general consensus then that the proposed process provided reasonable opportunity for insurance regulator participation and consultation in the non- bank consultation process, according to the NAIC’s website document.

The state regulators asked Director Huff to seek clarity that the references to consultation with primary financial regulatory agencies in the proposed guidance and preamble include the primary financial regulatory agencies of subsidiaries as required by statute and set forth in the rule text.

State regulators spoke in a discussion call held on Nov. 9, 2011 that was open to all regulators. Several members of the Government Relations Leadership Council, several chief financial regulators and other interested insurance regulators joined the call.

Regulators also expressed concern then about lack of clarity as to how decisions to advance specific companies through different stages will be formalized and documented by FSOC and wanted a transparent process.

According to the NAIC comment summary, regulators also agreed that it was imperative that memoranda of understanding or other confidentiality agreements would need to be executed between the states and the FSOC before any information sharing or consultation took place. Regulators asked Huff to request that regulators be consulted prior to any vote to advance a company, because the regulators will have valuable insights into the company’s operations that could potentially impact FSOC’s analysis. 

Commissioners also told Huff they wanted the FSOC to coordinate through “lead states” to gather information.  Regulators   believe that the guidance’s references to primary financial regulatory agencies implicitly refer to both regulators of the company and its subsidiaries they requested that the language be clarified.

State regulators said they believe other types of information collected in the future will be useful to the FSOC as well including group holding company reports detailing the enterprise-wide risks posed by non-insurance affiliates and own risk solvency assessments (ORSA) provided by companies to the regulators.