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Regulation and Compliance > Federal Regulation

Boston Fed gearing up for top tier regulation of Pru

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Do you want to help develop creative approaches to evaluating Prudential Financial’s financial condition, relative to peer companies? Or take on an “exciting role that offers the opportunity to contribute to the development and execution of a new set of responsibilities for the Federal Reserve System?”

The Boston Federal Reserve bank is now attempting to supervise the behemoth global insurer, Prudential, and is recruiting at least a half dozen top-level insurance supervisory positions plus support staff to prepare itself for regulating Prudential Financial as a Systemically Important Financial Institution under the Dodd-Frank Act.

Positions listed promise to offer the opportunity to forge new territory in insurance regulation, mentioning national supervision program management, “and the formation of supervisory policy related to specific areas of asset/liability management for insurers.”

The insurance-specific positions include a capital markets specialist, credit specialists, a fiduciary/asset management specialist “to lead and participate in reviews aimed at evaluating the effectiveness of asset management practices and compliance with fiduciary responsibilities at a large and complex insurance-focused financial institution,” an information technology (IT) examiner, an analyst and other positions.  

“This exciting role offers the opportunity to contribute to the development and execution of a new set of responsibilities for the Federal Reserve System,” one job description states. 

The IT job, which evaluates the effectiveness of management, also calls for good “conflict resolution” skills and the ability to have positive relationships.

The incumbent may also provide leadership or assistance in support of national supervision program management. As needed, they may also assist in the formation of supervisory policy related to specific areas of asset/liability management for insurers. 

Prudential, which lost its appeal to the deciding body, the Financial Stability Oversight Council (FSOC), in September, is subject to enhanced prudential supervision from the Federal Reserve under Dodd-Frank now that it is a nonbank SIFI. A little less than a month after it was clear Prudential would lose its appeal in a 7 to 2 vote, the Boston Fed listed the positions.

The Boston Fed, which features an insurance unit that long-time insurance regulator Cynthia Martin helps manage, got the call to be the host supervisor. AIG, the other insurance SIFI, is regulated out of the Federal Reserve Bank of New York.

Regulation will be at the holding company level. States will still oversee the insurance subsidiaries, although there is fear the Fed could require too much capital at the holding company level, ossifying the business of life and annuity insurance asset and liability management. 

If MetLife is designated a SIFI, it seems likely it will also fall under the umbrella of the Boston Fed, as it is developing expertise in life, health and asset management business supervision, and the New York Fed has its hands full with banking stability oversight. 

Because the board and the regional reserve banks work collaboratively to develop and implement supervisory programs for all supervised firms — including the insurance-focused nonbank SIFIs — Boston’s groundbreaking work in federal insurance regulation might be modeled elsewhere at some point. 

The insurance staff, according to sources, has not begun asking for data yet because it is not fully staffed and because the capital requirements for nonbank SIFIs — and also the insurers organized as savings and loan holding companies under the Fed’s purview — have not yet been formulated.

Just today, Federal Reserve Board Chair nominee Janet Yellen testified at a U.S. Senate nomination hearing that one size should not fit all when it comes to insurance, in reference to Basel III bank standards being imposed at some point on insurers. The Fed delayed those standards for businesses primarily engaged in insurance, but it believes legislation fixing that, which is pending in both cambers, may be the only long-term solution around the strictures of the minimum capital requirement statute in Dodd-Frank. 

Fed Chairman Bernanke commented in July testimony that legislation is needed to allow the Fed flexibility to deal with the so-called Collins amendment (Section 171 of Dodd-Frank), and tailor appropriate capital requirements for insurance companies.

Yellen also acknowledged under questioning today that the board would work with the International Association of Insurance Supervisors (IAIS) to formulate internationally-compatible supervisory rules now that some of the largest insurers have been designated by FSOC as systemic.
The  Fed is joining long-time members, the National Association of Insurance Commissioners (NAIC) as well as the U.S. Treasury’s Federal Insurance Office (FIO), under Dodd-Frank statutorily a voice of U.S. insurance oversight overseas,  as part of the United States team at the IAIS.

Industry representatives have heard that the Federal Reserve Board would move slowly at the IAIS and would not be pushy or join any of the critical working committees, that they would instead leave that to FIO and NAIC representatives — at least for now. However, it probably has its sights on capital rules as that is its new financial stability bread and butter tool. 

Earlier, the Fed, according to sources, had sought to join the high-level IAIS Executive Committee, which has one FIO member and two NAIC members from the U.S., and a couple from Canada, but has no more room for North American representatives unless one stepped down. The IAIS is working on group-level capital standards for insurance companies worldwide. 

The Fed declined comment for this article, as did Prudential.


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