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Life Health > Life Insurance

Top execs unite to fight application of Fed's capital standard to insurance

By Elizabeth D. Festa

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Insurance industry executives are continuing to press the Federal Reserve Board staff with arguments in favor of staying the hand of its bank-centric capital framework and its concomitant capital structures from insurers, sometimes meeting multiple times and engaging top executives.

In late August, a group of insurance industry representatives from companies with savings and loans or banks, from MetLife, Prudential Financial, Nationwide, Principal Financial to TIAA-CREF and State Farm met with almost a dozen Fed officials to again tell the consolidated regulator of thrifts and banks that it, judging by its proposed capital rules–“fails to recognize the distinct differences between the business of banking and insurance.”

On June 7, 2012, as the American Bankers Association (ABA) summarized, the Federal Reserve Board approved three proposals implementing the Basel III capital standards. These proposals could fundamentally change how banks calculate their regulatory capital requirements. The proposals would increase the minimum levels of required capital, narrow the definition of capital, and increase the risk weight assets for various asset classes, the ABA said, noting it was important for banks of all sizes to weigh in. Comments are now due Oct. 22, not Sept. 7, after insurers and banks asked for more time.

The insurance industry has been arguing its points for quite some time, without apparent headway, save for an extension for comments and thus, lobbying efforts. It is unclear if the arguments are falling on deaf ears, as the same points are made repeatedly and quite simply.

James Donnellan from the MetLife Board met with Fed staff earlier in August on some of the same issues, including the treatment of financial companies under the Fed’s notice of proposed rulemaking (NPR) to meet Basel III capital standards.

Donnellan, MetLife Treasurer Marlene Debel, Mark Grier, Prudential Financial vice chair and its global insurance markets czar,  two executives from Principal Financial, a company which met earlier in August with the Chicago Fed over similar concerns, and Mark Schwamberger from State Farm, gave a simplified over view of banks versus insurers at their Aug. 22 meeting.

Insurers may have gotten an extension for comments but not much time is left now before the new capital standards would become effective. There are about two dozen insurers with savings and loan holding companies (SLHCs), it is estimated.

They are worried that the NPR fails to provide for a good transition period for insurers with its proposed effective date of Jan. 1, 2013 for insurance company SLHCs, the executives argue.

The insurers have never before been subject to Basel requirements or consolidated capital requirements, and the extremely short transition time is unduly burdensome and contrary to the intent of Congress under the Collins rule, they argue. The Fed is acting through an amendment to the Dodd Frank Act 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 Dodd-Frank.

Bank capital requirements presume customer obligations are bank deposits and therefore, do not consider the principles of long term maturity/duration matching within the framework, the executives noted as part of their presentation, warning the NPR “disfavors a core element of the business of insurance.”

The insurers are trying to persuade the Fed that the state-based regulatory risk-based capital regime captures a number of risk exposures tailored specifically to insurance companies, including asset risk, insurance/underwriting risk, interest rate risk, and business risk. 

By contrast, the insurers say the Basel capital framework essentially measures asset risk and was developed specifically for the asset profile of banks.

Then the insurers go into specifics, voicing concern that the imposition of GAAP accounting on insurance companies is inappropriate and excessively costly. 

The proposed rule would require the implementationof GAAP accounting beginning in January 2013, which “is simply not enough time for insurers to institute the systems and processes necessary to provide the data required by the NPR,” they say.

And when they do, the effect will be very costly, they add.

However, although U.S. insurance companies currently prepare statutory accounting statements, as required by state insurance regulation, publicly traded insurers are already required to prepare GAAP-based financial statements for the Securities and Exchange Commission. So the auditing component is already taking place for most, if not all, large players, even if they are held to GAAP standards by their primary regulator, the states.

Even some mutual insurers who don’t need to also practice GAAP bookkeeping. For example, New York Life Insurance Co., (not part of the meeting, as it has no thrift) is audited by PwC for GAAP, and its GAAP numbers are on its website at newyorklife.com.

Under the NPR, all insurance companies subject to the rule would be required to prepare GAAP-based financial statements, raising their capital requirements, not for the Fed’s purposes the statutory accounting model (SAP) that supports the state risk-based-capital regime.

The insurers argue that SAP accounting appropriately reflects core insurance activities, related longer term investments, and insurer solvency considerations, and is focused on reserves for long-term claims. 

Insurers are also concerned that the Fed will impose a double counting of assets upon them because the holding company would have to deduct anamount equal to an insurers regulatory capital from the consolidated capital ratios, also resulting in insurers having to hold additional capital.

The savings and loan holding company’s deduction of an insurance subsidiary’s capital requirement would result in the same asset being weighted twice in the SLHC capital calculation: once as a holding of the insurance subsidiary and a second time as a consolidated holding of the SLHC (as owner of the insurance subsidiary), the insurers pointed out to the Fed officials. 

They also complained that the definition of “non-guaranteed” separate accounts is overly restrictive and will potentially exclude all separate accounts from being deemed “non-guaranteed under the proposed rules.

For example, with certain variable life insurance policies and variable annuities that provide minimum guarantees such as death benefits, guarantees are not related to minimum returns or account values, but since the death benefits require some reserving in the general account, the products should fit under definition of non-guaranteed separate accounts, the insurers argue. 

Time will tell if the Fed heeds insurers lectures championing the state regulatory system of financial oversight.

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