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Regulation and Compliance > Federal Regulation

Insurers Voice Deep Concern with Fed Capital Proposals

By Arthur D. Postal, Elizabeth D. Festa

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A recent filing by the Federal Reserve Board brings to the surface for the first time the battle insurers are waging to preserve state regulation and limit federal intrusion on their activities.

The battle was exposed through a filing by the Fed of an Aug. 6 meeting of officials of the Principal, Des Moines, Iowa, with the Federal Reserve Bank of Chicago over capital standards for insurance companies which operate thrift holding companies proposed June 6.

Susan Houser, assistant vice president for corporate relations for the Principal, said in a statement to National Underwriter that the Fed’s proposal would affect any bank, insurer or financial institution that has a savings and loan holding company structure.

“We presented our company view on Aug. 6 and also plan to submit a comment letter,” Houser said. “However, we cannot speculate about specific impact to The Principal until the final rules are released.”

See also: The Fed’s Hit List

Fed regulators, led by the Board of Governors of the Federal Reserve System, want to use the capital standards to provide consolidated regulation of insurers which operate thrifts.

The proposal would subject institutions that have thrift holding companies to the same capital standards as banks at the holding company level, except for certain unique insurance activities.

An industry lawyer who asked not to be named said that between 25 and 27 insurance companies that operate thrifts could be subject to Fed oversight under the proposed capital standards. The lawyer, based in Washington, D.C. asked not to be named because he is advising several clients who are dealing with the proposal.

The lawyer said the provision of the Dodd-Frank Act shutting down the Office of Thrift Supervision (OTS) and shifting oversight to the Fed did not change the underlying law regulating thrift holding companies, the Home Owners Loan Act.

However, the lawyer said, the Fed will likely enforce the law more rigorously than the OTS.

The lawyer also said the Fed is acting through an amendment to DFA sponsored by Sen. Susan Collins, R-Maine, mandating that federal regulators impose consolidated capital standards on thrift and bank holding companies they supervise. The provision is Sec. 171 of DFA, the lawyer said.

Insurers are “lawyering up” with outside counsel from top-rated, international law firms for help in developing their response.

Rep. Spencer Bachus, R-Ala., chairman of the House Financial Services Committee, sided with insurers.

“As you know, this rule is extremely complex, so additional time for commenting is certainly justified,” Bachus said.

“Additionally, I feel that a longer comment period will lead to more substantive comments, which in turn will be much more useful to reviewers,” Bachus said.

American International Group president and CEO Robert Benmosche stated at the company’s earnings conference call Aug. 6 that AIG is likely to be regulated soon through its thrift holding company or other means by the Federal Reserve Board.

John Nadel, an industry analyst with Sterne Agee, believes that Fed oversight of AIG could occur as early as mid-September.

That’s because government ownership of AIG is expected to fall from the current 53 percent to less than 50 percent through sale by AIG of a foreign subsidiary’s stock in early September, likely quickly followed by another public sale of AIG stock by the Treasury.

Under the law, the Fed cannot regulate a company controlled by the federal government.

Benmosche has already outlined what Fed regulation would look like for AIG, and the Fed capital proposal provides further guidance as to what metrics Fed regulators will be looking at when they peruse AIG’s books.

The National Association of Insurance Commissioners as well as a number of insurers are not responding to request for comment on the issue.

In response to a request for comment on a number of specific issues related to the Benmosche comments and proposal by federal regulators, Kevin McCarty, NAIC president and Florida commissioner, declined comment.

“The NAIC is currently in the process of evaluating the proposed federal rules, and cannot comment further at this juncture,” he said.

Representatives of property and casualty insurers have also not responding to requests for comment on the Fed proposal.

But, a spokesman for the American Council of Life Insurance said late Thursday, “We certainly are interested in the issue. On behalf of our members we plan to make our opinions very clear.”

Fed officials are also declining comment.

But they are providing guidance to insurers and members of the press that their actions are mandated under the Dodd-Frank Act, and that the agencies are not acting unilaterally.

Under the proposal, special capital treatment for insurers would be only applied to specific activities, such as separate accounts, deferred acquisition costs and insurance underwriting.

At the meeting with Chicago Fed officials, according to the Fed filing, Principal officials “expressed concern” about including such insurance-specific categories as unrealized gains/losses in capital ratio calculations for insurance companies.

According to the filing, this would involve inclusion of non-guaranteed separate accounts in the denominator of the leverage ratio, and the deduction of 200 percent of the Authorized Control Level NAIC Risk-Based Capital for insurance companies,

Banks are also concerned about the proposal. It would apply tougher capital rules than now in place for all U.S. banks under an international set of rules known as Basel III.

But, under the Dodd-Frank financial services reform law, it would bring insurers for the first time under federal regulation.

The concerns of the insurers are much deeper than cited in the document provided the Fed by the Principal.

The industry lawyer says the primary concern of insurers with the proposed regulation is that it would subject them to bank-centric rules even though the businesses are fundamentally different.

“They are very scared of Fed regulation,” the lawyer said. He declined to comment for the record because he and his clients are still in the process of drafting their response to the Fed proposal.

“Many insurers with thrifts or otherwise subject to federal oversight are very scared of intrusive Fed regulation,” he said.

“They are also scared of having consolidated regulation at the holding company level at the first time in the way the Fed is proposing,” he said. “Where does that leave the states?” they are asking.

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