Federal financial services regulators could end up leaving state insurance regulators in charge of ensuring that giant insurers exercise and eat their vegetables.
The head of a group for state insurance regulators is welcoming a Financial Stability Oversight Council (FSOC) proposal that could give him and his colleagues more authority over insurance giant wellness.
Eric Cioppa, president of the National Association of Insurance Commissioners (NAIC), put out a statement responding to proposed changes in how FSOC identifies organizations other than banks that are too important to the stability of the U.S. financial system to fail, and how FSOC responds to concerns about those organizations’ financial health.
“I am generally supportive of this proposal and look forward to the reactions of my insurance regulator colleagues,” Cioppa said in a statement. “The most appropriate approach to addressing risks to financial stability is for FSOC to work in conjunction with existing regulators to identify those risks, especially in the non-bank sectors. Mitigation is best handled by the regulators with authorities to address them in the first instance.”
The 2007-2009 Great Recession led to complicated problems in the U.S. financial system.
Many insurers and other nonbank companies joined banks in seeking financial support from the federal government, in an effort to cope with sudden, recession-linked paralysis in the credit markets.
When Congress developed the Dodd-Frank Wall Street Reform and Consumer Protection Act, it set up FSOC to help the federal government understand and manage problems that could lead to another Great Recession. FSOC is headed by the U.S. Treasury secretary. It also includes the heads of federal financial services regulatory agencies, and it includes a member who has insurance expertise.
FSOC set up a program for identifying ”nonbank systemically important financial institutions,” or nonbank SIFIs. Nonbank SIFIs are supposed to be organizations that are too big, or too important in other ways, to fail.
When FSOC began designating and regulating nonbank SIFIs, insurers identified, such as MetLife Inc., argued that the “too big to fail” designation process seemed arbitrary, and that the extra requirements imposed were difficult and expensive to meet, duplicative of other regulatory efforts, and, in some cases, lacking in relevance to the business of insurance.
The administration of President Donald Trump has blocked the original FSOC nonbank SIFI designation process, which was developed under former President Barack Obama, and started to develop a new process.
In the text of the proposed guidance, FSOC has said that it would add a cost-benefit analysis to decisions about whether to designate an organization as a nonbank SIFI.
FSOC says it will also :
- Try to focus less on regulating specific companies, and more on regulating activities at all companies that might add to risk.
- Give any company it reviews more information about what FSOC and other regulators are seeing, to help a company’s managers understand the aspects of the business that could, possibly, hurt the U.S. financial system.
- Create a process that a nonbank SIFI could use to escape from the nonbank SIFI designation.
A Rating Agency Reacts
Laura Bazer, a vice president at Moody’s Investors Service, a firm that rates insurers’ ability to pay their claims, said in a statement that she believes the proposed nonbank SIFI designation process changes could increase the odds that insurers and asset managers will run into problems.
“Requiring a cost/benefit analysis and probability assessment of a company’s financial distress would raise the nonbank SIFI bar so high, that few, if any, companies would be designated, thereby foregoing the benefits of additional U.S. Federal Reserve oversight,” Bazer said.
A summary of the proposed guidance, and a link to the full text, are available here.
The text has not yet appeared in the Federal Register. A 60-day comment will begin after the official Federal Register publication date.
— Read Prudential Sheds ‘Too-Big-to-Fail’ Label, But…, on ThinkAdvisor.