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.”
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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that if AIG’s financial distress were sufficiently sever, funds from products allowing for early withdrawals might be withdrawn regardless of the size of associated surrender charges or tax penalties leading to a “rapid liquidation of AIG’s life insurance and annuity liabilities” and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.