Ahead of a comment period deadline, almost two dozen members of the Senate from both sides of the aisle, led by Sen. Sherrod Brown (D-Ohio) and Sen. Mike Johanns (R-Neb.), sent a letter to the top federal banking regulators, including Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, warning them that the application of a bank-centric capital regime to the insurance industry would fundamentally alter the nature of the business, undermine prudential supervision and unintentionally harm insurance policyholders, savers and retirees.
The letter, also sent to the heads of the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), raised the question of Congress’ intent in designing the rules—namely that insurers should be treated differently in line with their business models.
The issue involves looming capital standards directed at insurers as well as banks from a regulatory smorgasbord of new rules that grew out of the 2010 Dodd-Frank Act (Dodd-Frank).
The Federal Reserve, after Congress interceded in August on behalf of both banks’ and insurers’ lobbying efforts, has already extended the comment period until October 22, 2012, on the proposed rulemaking that would revise and replace current capital rules. The proposals by the Federal Reserve, the FDIC and the OCC would implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and The Collins Amendment (an amendment to Dodd-Frank sponsored by Sen. Susan Collins (R-Maine), mandating that federal regulators impose consolidated capital standards on thrift and bank holding companies that they supervise).
Insurers with thrifts, which number about 25, from medium-sized Midwestern plains insurers with small savings and loans to large life and property companies like Principal Financial, Prudential Financial, TIAA-Cref and State Farm are considered Savings & Loan Holding Companies (SLHCs) and will be subject to Basel III international standards for capital and liquidity by the Federal Reserve as a consolidated regulator at the holding company level.
The American Council of Life Insurers (ACLI) also sent a letter late last week to the same banking regulators, enumerating in detail how a bank or thrift holding company with an insurance subsidiary would be required to hold higher capital against the same assets as a bank or thrift without an insurance company.
The ACLI’s Julie Spiezio explained to the federal banking supervisors that the effects of the capital requirements on insurers would be worse than on banks due to their need to invest in assets like long-term debt in order match long-dated obligations and hold them for long periods of time thus exposing them to more volatility in their capital ratios and therefore triggering other actions.
“First and foremost, increased volatility will cause significant fluctuations in insurers’ regulatory capital ratios. These fluctuations will be significantly greater in magnitude than those experienced by traditional banking organizations and may cause the unintended result of having the insurers’ capital ratios appear lower than warranted by the overall safety and soundness of the organization,” Spiezio wrote on October 12.
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.
Staffers from Collins’ office have been said to have visited the offices of the insurance regulatory association staff to explain that Collins didn’t actually mean for the amendment to apply to insurers, but whether that argument would win the day, even if made by Collins herself to the Fed, is disputed—some say a statute is a statute. The Fed could punt the issue back to the legislature to fix. A call to Collins’ office was not returned as of press time.
Aside from international measures being developed for multinational companies in a couple of project streams by the International Association of Insurance Supervisors (IAIS) under the G-20’s Financial Stability Board (FSB), new capital standards—as yet unspecified—will also apply to any insurer that may be designated systemically important (SIFI).
“Any final regulations should reflect the will of Congress to respect the distinctions between insurance and banking,” the Senators stated.
The Senators explained that the Committee Report that accompanied the Restoring American Financial Stability Act provided direction to the federal banking agencies to consider insurance companies’ existing regulatory requirements, accounting treatment, and unique capital structures in developing capital requirements for insurance entities.
The Senators also urged the banking regulators to provide insurance companies with an adequate transition period, fitting somewhere between these effective dates, in order to comply with any new capital rules.
“We are concerned that some of the proposed rules, as drafted, do not reflect the distinct nature of the insurance business or take into consideration the state risk-based capital system that was specifically developed for the insurance industry and refined over the past 20 years,” the Senators stated.
“While we recognize that Dodd-Frank directs the federal banking agencies to establish minimum capital standards on a consolidated basis, Congress did not intend for federal regulators to discard the state risk-based capital system in favor of a banking capital regime,” they stated in the letter.
More to the point, the ACLI stated that it “unequivocally believes that the current insurer risk-based capital system (RBC) is best suited to measure the capital needs of insurance companies and is therefore best suited to also meet the needs of the Board of Governors of the Federal Reserve System (the Board) when it assesses the capital adequacy of insurance company enterprises under these proposals.”