The U.S. Financial Stability Oversight Council (FSOC) has until Sept. 23 to decide upon the appealed designation of Prudential Insurance as a systemically important financial institution (SIFI). But one member of the group of the nation’s top financial regulators says some of his colleagues don’t seem to understand how insurance works.
One of the five nonvoting FSOC members, Missouri Insurance Director John Huff, said today, during a meeting of the National Association of Insurance Commissioners‘s (NAIC) financial stability committee, that “some of my fellow FSOC members may not understand the insurance industry.”
Specifically, Huff referred to the arguments the FSOC used in its analysis of AIG, such as a possible run on the company and the loss of confidence in the insurance sector should one insurer fail as a “very bank-centric approach.”
Huff, speaking at the NAIC summer meeting in Indianapolis, said that the designations are a serious exercise with serious consequences and it is “critically important they are based on robust analytics.”
The allegedly flawed thinking may also play a part in future SIFI insurance designations. MetLife has disclosed it is in the stage 3, “deep dive” part of the SIFI process with FSOC. Moreover, there are other companies being reviewed for SIFIs, Huff disclosed today. SIFI reviews are an evergreen issue.
The FSOC majority wrote that if AIG’s financial distress were sufficiently sever, funds from products allowing for early withdrawals might be withdrawn regardless of the size of associated surrender charges or tax penalties leading to a “rapid liquidation of AIG’s life insurance and annuity liabilities” and straining AIG’s liquidity.
FSOC also suggested contagion, which is found in the banking sector.
“In particular, if distress at AIG were to cause concern among policyholders at other insurers, those insurers could experience unanticipated increases in surrender activity that could strain liquidity resources, potentially impairing the financial condition of multiple insurers across the industry,” FSOC wrote.
This analysis might play a part in Prudential’s ultimate designation, despite its pleas against such a scenario.
This analysis had left others in the sector also shaking their heads and certain the SIFI designation will also be applied to Prudential, which appealed its tentative designation about a month ago.
The FSOC statement says it carefully considered “a broad range of information” in light of the statutory factors under the Dodd-Frank Act, both separately and in conjunction with each other, and consulted with AIG’s primary financial regulatory agency, the Federal Board of Governors, as well as regulators of certain AIG insurance subsidiaries.
In addition, Prudential was designated a global systemically important insurer (G-SII) by the Financial Stability Board (FSB) on July 18, and FSOC handles that designation domestically, it says. There is no appeal process with the FSB. NAIC spoke out on the global designations, which include MetLife and AIG, calling them premature and too reliant on insufficient metrics.
On the Prudential proposed designation, Huff noted his dissent although he doesn’t cast a vote. Presidentially-appointed member Roy Woodall, the one insurance person with a vote on the FSOC, dissented, along with Edward DeMarco, director of the Federal Housing Finance Agency. Federal Insurance Office Director Michael McRaith’s vote was not publicly recorded, but his office is part of Treasury, whose secretary chairs the FSOC, which did vote to designate Prudential a SIFI.
Besides Woodall, DeMarco and Treasury Secretary Jacob Lew, other voting members of FSOC are:
- Chairman of the Board of Governors of the Federal Reserve System;
- Office of the Comptroller of the Currency (OCC);
- Director Consumer Financial Protection Bureau (CFPB);
- Chairman of the Securities and Exchange Commission (SEC);
- Chairperson of the Federal Deposit Insurance Corporation (FDIC);
- Chairperson of the Commodity Futures Trading Commission (CFTC);
- Chairman of the National Credit Union Administration (NCUA); and
- The nonvoting members, besides Huff and McRaith, are the Director of the Office of Financial Research, a state banking supervisor designated by the state banking supervisors and a state securities commissioner.
Established under the Dodd-Frank Act, FSOC is charged with identifying risks to the financial stability of the United States, promoting market discipline and responding to emerging risks.