Future SIFI Landscape Will Change Industry Dynamics, NAIC Execs Say

The NAIC leadership is paying close attention to the insurance industry market and policyholder environment landscape in the wake of future systematically important financial institution (SIFI) designations, (a requirement of the Dodd Frank Consumer Protection Law) its leadership made clear today during an insurance regulatory conference here in Washington. 

There could be “unintended consequences” of the SIFI designation, said NAIC president and Florida Insurance Commissioner Kevin McCarty. 

“You are going to have winners and losers,” and there will be consequences on how management behaves if a company is too big to fail. 

Currently, “there are less than 50 nonbank financial companies, including potential insurers, that would meet the Stage 1 thresholds,” said  John M. Huff, a nonvoting FSOC member representing insurance and Director of Missouri’s Department of Insurance, Financial Institutions & Professional Registration.  

Huff did say there are a “finite group of people” who understand statutory accounting and that there are a “group of people trying to cram our sector into a [box] that does not work.”  He said the hand the industry and regulators were dealt is “bank-centric.”

However, he said there is now a framework for a SIFI designation with the recently released criteria and insurance regulators can talk about their tools and what it is they do.  

Both McCarty and NAIC CEO Dr. Therese (Terri) Vaughan agreed that once an insurer is identified as a SIFI, and “gone down that path,” the company needs to be told to “stop doing what got you on the SIFI list to begin with.”

A better-reasoned approach would be to look at what makes a company systemically risky, McCarty said in a talk with the press during a an international insurance issues conference sponsored by the NAIC here in Washington. 

Mark Grier, Prudential Financial Inc.’s vice chairman, also spoke about worrisome unintended consequences caused by banking regulators perhaps not understanding insurance accounting issues and taking the wrong approach, thereby affecting the availability of capital and the availability of certain types of insurance products.

There is also “headline risk,” from news channels like CNN, according to Grier, who spoke as part of a panel on the SIFI issue before attendees if companies are portrayed inaccurately.

Grier said the focus needs to be on insurance company reserves, as cash flows and product designs come from capital models that come out of the framework of reserves and stochastic liabilities.

“Our argument is the best way to start (understanding insurance regulation) is through statutory accounting,” Grier said. Prudential is thought by analysts to be a candidate for a SIFI designation. It has “withstood the test of time, it doesn’t have pro-cyclical volatility,” he said.

Grier worried that with SIFI or G-SIFI designations, the industry would get two classes of companies, those with a halo and those without a halo.