To those in the life insurance industry who weren’t paying attention, on Sept. 9 the Federal Reserve Board — in the most precise terms — outlined an extremely limited role in overseeing insurance companies.
“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,” said Daniel Tarullo, Fed governor most directly involved in regulatory activities. “Our purpose is a different one, which is assuring on a consolidated basis the safety and soundness of large financial institutions.”
Tarullo added that 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. Through his testimony, he was seeking to remove federal encroachment on insurance regulation as a political issue in advance of critical mid-term elections, where control of the Senate is at stake.
Tarullo said the Fed will not give up any of its political capital to bring insurers under federal control, although it has concerns about the viability of the life insurance business going forward. Whatever gives members of Congress (MOCs) political cover — that is getting state insurance officials, who are concerned about loss of power, off their backs — is fine with the Fed.
It also sought to ease pressure on the Obama administration by addressing the concerns MetLife has raised with MOCs about its preliminary designation last month as a systemically important financial institution (SIFI), and by reassuring MOCs about why the Federal Stability Oversight Council designated MetLife.
Tarullo touched all the bases by saying the Fed would support raising the threshold for SIFI designation from the current $50 billion to $100 billion. This would ease the concerns of smaller insurers, both life and property/casualty, over whether federal regulators have them in the crosshairs for SIFI designation.