Insurance industry officials fear Armageddon will be the result of a proposal by the Federal Reserve Board to use what it fears will be “bank-centric” standards in regulating insurance companies which operate thrifts.
In a key letter, the chief financial officers of eight insurance companies, including Prudential, TIAA-CREF and the Principal, say that the proposal, if adopted, would require all insurance organizations subject to the Fed’s supervision, “regardless of size, to meet new minimum capital requirements beginning Jan. 1, 2013.”
Other signatories include Nationwide, Mutual of Omaha and USAA, as well as two small thrifts operated by farm-based cooperatives, Country Financial and the Westfield Group.
Two property and casualty-oriented companies also voiced deep concerns with the provisions.
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In its letter, the National Association of Mutual Insurance Companies said the proposals to provide consolidated regulation of insurance companies represent a “sea change.”
In its letter, Nationwide Mutual Insurance Company said the regulation, if adopted as proposed, “could threaten the existence of the savings and loan holding company industry.”
The CFO letter said they “share the concerns expressed by the Financial Service Roundtable and the American Bankers Association in their comment letter on the issue. Included in the FSR’s membership are a number of large, global insurance companies. The ABA members include some banks which operate large insurance brokerages.
The Fed is proposing the rules as the successor to the Office of Thrift Supervision. The OTS was phased out and its responsibilities shifted to the Fed and the Office of the Comptroller of the Currency through the Dodd-Frank financial services reform law.
That decision was made, based on testimony to Congress by the National Association of Insurance Commissioners, amongst others, that the OTS, as the consolidated regulator of American International Group, was responsible for supervising AIG’s Financial Products Group, not state regulators.
An amendment to the legislation sponsored by Sen. Susan Collins, R-Maine, specifically mandates consolidated supervision of all non-banks which operate thrifts by the Fed.
The Fed was forced to bail out AIG in Sept. 2008 after it was learned that AIG could not afford to meet margin calls on $2.77 trillion in credit default swaps AIGFP had issued to insure mortgage-backed securities of various qualities issued by U.S. securities firms.
At one point in 2009, the Fed had advanced in loans or credits approximately $182 billion in cash to keep AIG afloat.
Currently the U.S. position in AIG is being phased out.
The CFO letter also suggests that because insurance companies that have savings and loans have not been regulated by the Fed previously, new capital requirements should not be applicable until July 15.
“Such companies have never been subject to Basel requirements and this extremely short transition period is unduly burdensome and contrary to the express intent of Congress in the Collins Amendment,” the CFO letter said.