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Life Health > Life Insurance

FSOC hones in on insurers' interest rate risk

By Arthur D. Postal, Elizabeth D. Festa

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Treasury Secretary Jacob Lew said today that the Financial Stability Oversight Council will vote “soon” on designating nonbanks, such as insurers, as systemically significant.

At the same time, the FSOC said in its annual report released today that the Federal Insurance Office and state insurance regulators “should continue to be vigilant” about interest rate risk.

The report identified interest rate risk at insurance companies as “one of a handful of serious vulnerabilities” about which the FSOC must maintain close scrutiny.

As the meeting got underway, Sen. John Tester, D-Mont., and Sen. Mike Johanns, R-Neb., chairman and ranking minority member of the Banking Securities, Insurance and Exchange Subcommittee of the Senate Banking Committee, said in a letter sent to Lew today asking for clarification from Treasury about its intent to make public analysis used to evaluate nonbank financial institutions for possible designation as SIFI. The letter encouraged the FSOC to differentiate among different industries and not just use bank metrics to evaluate nonbanks.

Securities analysts expect that AIG, General Electric, and Prudential, will comprise the first round of designations.

Washington Analysis said in an investor’s note this week that it expects MetLife to be designated shortly thereafter, possibly as early as the third quarter of this year.

At the same time, John Nadel, of Sterne Agee & Leach in New York, issued an investor’s note indicating that the Federal Reserve Board, which would oversee nonbanks designated as SIFI, is leaning toward adjusting the metrics used to evaluate insurers to reflect the differences between banks and insurers, the same issue raised by Tester and Johanns in their letter.

An FSOC official told reporters on background later that the FSOC is now more focused on interest rate risk for life insurers than in past years. “What has changed is that when interest rates and volatility are low, people increase leverage, the duration of their investments and take on increased risk,” the official said.

”I think what we see in the markets in the past year are more signs of risk, for example, very high issuance of high-yield bonds of companies of less-than-stellar quality. There is also concern about weakness in loan underwriting that the agency is focusing on more this year than last, the official said.

The official acknowledged that state regulators are already working to quantify this risk.

The official noted, using the terminology “bucket,” or areas of concern, has grown to include very broad areas of operational risk, for example, the use of faster technology in trading and the fact that these activities are being conducted in more markets than in the past. 

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