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Regulation and Compliance > Federal Regulation

The Implications of Federal Regulation

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What will federal regulation of insurance holding companies like American International Group look like?

Federal banking regulators have provided a strong hint as to how they will regulate non-banks such as insurers through a proposed rule published for comment in June.

Under the proposal, insurers which operate thrifts or are designated as systemically significant or SIFI would be subject to the same capital standards as banks at the holding company level except for certain unique insurance activities.

Special capital treatment for insurers under the proposal would be only applied to specific activities, such as separate accounts, deferred acquisition costs and insurance underwriting. Otherwise, they would be regulated as banks.

It is likely that the same capital standards would be applied if the Financial Stability Oversight Council designated an insurer as a SIFI and subjected them to Federal Reserve Board as well as state oversight.

The Office of Thrift Supervision (OTS) was AIG’s consolidated regulator before Dodd-Frank was enacted.

All of OTS’s insurers were officially transferred to Federal Reserve Bank supervision when the OTS was disbanded.

In general, supervision of thrifts was shifted to the Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation through Dodd-Frank.

Dodd-Frank abolished the OTS effective July 21, 2011.

The Fed was given all OTS authority over savings and loan holding companies. These are companies, including large insurance companies, which own a federal or state chartered savings association.

The OCC was given supervisory authority over federal savings associations (but not over the companies that own these associations).

The Federal Deposit Insurance Corporation was given authority over the few remaining state-chartered savings associations.

The Fed’s authority over companies that own a savings association is very broad, according to a former top lawyer at a federal banking regulatory agency.

According to the lawyer, Dodd-Frank gives the Fed the authority to examine these holding companies, set minimum capital and liquidity requirements, restrict or prohibit transactions between the holding company and the savings association subsidiary, establish prudential standards, require internal controls, mandate policies and procedures that must be followed, and can take enforcement actions against officers and directors of the holding company.

The OCC has similar broad authority, but only over the Federal savings association entity, and direct subsidiaries of the savings association.

The OCC cannot examine or regulate the holding company, according to the former counsel.

The Federal Deposit Insurance Corporation is similarly limited to regulating and supervising the state chartered savings association entity, the lawyer said.

Only the Fed has supervisory and regulatory authority over the parent company, which will include many of the larger insurance companies.

In an interview with The National Underwriter for an earlier story, a top official at a Federal Reserve Bank (Fed regional banks will likely be involved in overseeing insurers with thrift operations or designated as SIFI) said, “We want to develop a thoughtful and effective supervisory approach for savings and loan holding companies that are primarily engaged in insurance operations.”

The official said that, “Certainly there are similarities, but also important differences between the banking and insurance industries.

“It is incumbent upon us to understand the business strategies and risk profiles of these firms and reflect that awareness in our supervisory approach,” the official said.


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