The Federal Reserve Board outlined for itself a very circumscribed role in regulating insurance companies. Specifically, it made clear that it doesn’t want to preempt the role of state insurance regulators in overseeing the traditional activities of insurance companies.
In an appearance before the Senate Banking Committee, Daniel Tarullo, the Fed governor most directly associated with financial regulation, also emphasized that the Fed has a different role to play in overseeing insurance companies, a role only associated with assuring the safety and soundness of the U.S. financial system.
“We don’t want to be in the business of regulating insurance companies the way state insurance commissioners do, which is trying to preserve the franchise for the benefit of the policyholders,” Tarullo said. “Our purpose is a different one, which is assuring on a consolidated basis the safety and soundness of large financial institutions,” Tarullo added.
Tarullo also said he would “draw a distinction” between the creation of capital standards for traditional core insurance activities on the one hand and an assessment of systemic risk on the other. His answers appeared to go a long way in appropriately addressing the concerns of MetLife, which Thursday was preliminarily designated a systemically important financial institution (SIFI).
Tarullo also said that the Fed would support raising the threshold for SIFI designation from the current $50 billion to $100 billion. That would ease the concerns of smaller insurers, both life and property and casualty, that federal regulators have them in the cross-hairs for SIFI designation.
Currently, American International Group (AIG) and Prudential Financial have been designated as SIFI, and MetLife was told Thursday that the Financial Stability Oversight Council (FSOC) has preliminarily designated them. MetLife has 30 days to tell the FSOC it wants to appeal the designation. The FSOC will then hold a hearing on the issue.
Ryan Schoen, an analyst with Washington Analysis, said in an investment note following Tarullo’s testimony that Congress is likely to propose that, especially if Republicans take control of the Senate, as expected. “Tarullo’s support provides political cover for Democratic Dodd-Frank defenders, and there is widespread support among Republicans,” Schoen said.
Tarullo said that the Fed is following “two tracks” on the issue of regulating insurance companies, both those designated SIFI and those that operate thrift holding companies.
First, he said, the Fed is conducting a quantitative impact study aimed at developing information that would allow to more appropriately overseeing “insurance industry-specific products.”
“Under one alternative, we would be able to take account of the different liability structure of core insurance kind of activities and that would allow us to shape capital requirements at the consolidated holding company level in a way that fully took account of those differences in business model,” Schoen said.
Second, he said, it would be “very helpful” if the House followed the Senate and passed legislation that would give the Fed greater flexibility in interpreting the so-called “Collins amendment,” Sec. 171 of the Dodd-Frank Act. The bill passed the Senate by unanimous consent in July, but is being held up in the House as part of an effort by conservatives to narrow the scope of the Terrorism Risk Insurance Act.