WASHINGTON — The Federal Reserve Board said Friday that it will soon propose two-tier capital requirements for the insurers it oversees: one for insurers deemed systemically risky, and another for insurers it oversees because they operate thrift holding companies.
Washington Analysis, which interprets federal regulatory rules for institutional investors, said the forthcoming guidelines will create “manageable capital rules” for American International Group and Prudential Financial, two institutions it oversees as systemically important financial institutions (SIFI). Therefore, it would reduce the “regulatory uncertainty that continues to hang over the group,” said analyst Ryan Schoen.
The risk-weightings are not likely to be as onerous as they are for banks, as regulators recognize the longer-term nature of most insurance liabilities, Schoen said.
The second group of insurers would be overseen through a “building block approach (BBA),” said Daniel K. Tarullo, the Fed governor who oversees regulatory requirements for the Federal Reserve Board.
But, Schoen added, Tarullo’s comments “are light on detail and do not outline what the risk weightings of each asset class will be, though we expect regulators to be more lenient on corporate debt holdings and other assets than they are for SIFI banks.”
The Fed is legally required to retain the state-devised, statutory regulatory principles in overseeing these institutions, Tarullo noted, not the Generally Associated Regulatory Principles it will use in overseeing AIG and Prudential. Washington Analysis said the regulatory approach for the two SIFIs outlined by Tarullo will “be based on modified GAAP accounting.”
This approach would “efficiently leverage” the current state-based regulatory capital requirements that already apply to these institutions, Tarullo said, seeking to reassure those institutions and state regulators that these requirements would not be burdensome.
He said they would “involve relatively low” additional compliance requirements for them, “even as it produces regulatory capital requirements that are reasonably well tailored to the insurance-related risks for each distinct jurisdiction and business line of the group.”
This includes property casualty insurers such as USAA, Nationwide Mutual Insurance Co. and State Farm Mutual Automobile Insurance Co., all of which operate savings and loans.
Tarullo made his comments at the National Association of Insurance Commissioner’s International Insurance Forum in Washington.
Tarullo said the proposals will be made in the “coming weeks” through an advanced notice of proposed rulemaking that will allow both insurers and state regulators the opportunity for considerable input into the process.
In his comments, Tarullo sought to reassure state regulators that the Fed did not intend to supplant state insurance regulation through authority granted it in the Dodd-Frank Act.
John M. Huff, NAIC president and insurance director of Missouri, responded to Tarullo’s comments by saying that, “The Federal Reserve and state regulators have complimentary roles to play in protecting U.S. policyholders and the financial system at large.”
He added that, “We appreciate Governor Tarullo’s engagement with the NAIC and look forward to working closely with the Federal Reserve as its supervisory framework is further developed.”
Regarding the international efforts that so concern state regulators, Tarullo said the Fed does not and will not play any role in regulating the products sold by insurance companies, and is barred by law from imposing GAAP-like regulatory requirements on insurers it regulates.
He also reiterated that the Fed does not support the Solvency II approach used in the European Union. He said those capital requirements “strike us as unpromising.” State regulators and insurers have enlisted conservative elements in Congress to put pressure on the Fed not to adopt those rules. Tarullo was detailed in providing reassurance to state regulators and insurers that the Fed would not consider adopting such an approach.