Officials at the Financial Stability Oversight Council (FSOC) say they will communicate better, emphasize general financial safety advice, and think harder about cost-benefits ratios when they decide whether a life insurer or other nonbank company poses a serious threat to the U.S. financial system.
But FSOC officials will still have the authority to give an insurer’s state insurance regulators “nonbinding recommendations” about what do if it looks as if an insurer is diving head first into the shallow end of the pool, and to tell the public why it gave the state regulators those nonbinding recommendations, according to a new batch of FSOC “interpretive guidance,” or explanation of how FSOC interprets the rules for designating insurers and other nonbank companies as risky.
For big insurers that look safe to FSOC, the new rules could mean fewer regulatory headaches.
For insurance agents, the new rules could mean that, any time FSOC gives “nonbinding recommendations” about an insurance company to other regulators, that would be something to watch closely.
The FSOC Story
Congress created FSOC in 2010, in the Dodd-Frank Act, as financial services companies and regulators were still cleaning up from the aftermath of the devastating 2007-2009 Great Recession. Some life insurers had to get help from the federal government to deal with disruption in the financial markets.
Congress gave FSOC great flexibility in determining which entities and activities might bring on a Great Recession II, in part because many members of Congress felt that they, and federal financial regulators, had been surprised to learn, in 2007, that problems with financial instruments linked to mortgage-backed securities could shake the entire financial system.
In 2012, FSOC posted rules for designating life insurers, asset managers, and other “nonbank companies” as “systemically important financial institutions,” or SIFIs. FSOC let itself have broad discretion in applying and maintaining SIFI designations, in an effort to keep companies from trying to game the SIFI designation system.
The insurers that were designated as SIFIs reported that complying with SIFI oversight rules was difficult and expensive; that FSOC SIFI oversight duplicated what state insurance regulators had already been doing; and that they had trouble finding out why they had been designated as SIFIs, or finding out what they could do to escape from SIFI status.
Courts have freed the life insurance sector SIFIs from SIFI status, and the administration of President Donald Trump has made revamping the nonbank SIFI designation rules a priority.
The New Rules
FSOC officials say in the new SIFI designation rules, and in the introduction to the new rules, that they plan to start by focusing mainly on potentially risky activities, and talking about what all companies could do better, rather than on designating specific companies as SIFIs.
Some critics of the new FSOC guidance argued, while a draft released in the spring was under consideration, that an activities-based approach would reduce FSOC’s ability to respond to serious problems at specific companies.
FSOC officials say in the introduction to the new rules that, if an insurer or other nonbank looks as if it could bring down the financial system, and the primary regulators’ response appears to be inadequate, FSOC can still give a shaky-looking nonbank’s primary financial regulators nonbinding recommendations about how to proceed, using authority provided by Section 120 of the Dodd-Frank Act..
“The authority to issue recommendations to primary financial regulatory agencies under Section 120 is one of the council’s most formal tools for responding to potential risks to U.S. financial stability,” FSOC officials say in the introduction to the new rules.
Before telling an insurer’s insurance regulators what to do, FSOC would have to either assess the costs and benefits of designating an insurer as a SIFI and changing what the insurer could do, or make sure the SIFI’s primary regulator would do a cost-benefit analysis, officials say.
Although FSOC has approved the final rules, it still has to publish the official version in the Federal Register. The final version is set to take effect 60 days after the official Federal Register Publication date.
FSOC lists Howard Adler, Eric Froman and Mark Schlegel as the contact people for the new rules.
Responses to the New Rules
The National Association of Insurance Commissioners says in a statement that it believes the new FSOC guidance appropriately prioritizes activities-based approaches to identifying systemic risk and the importance of working with organizations’ regulators to address concerns.
The new guidance” will also ensure a more robust exit-ramp for any designated firms and provides more transparency into the reasons for designation,” the NAIC says. “The NAIC has long advocated for these changes and appreciates the revisions adopted by FSOC.”
Susan Neely, president of the American Council of Life Insurers, says in a statement that the ACLI strongly supports the new FSOC guidance.
“By applying an activities-based approach, FSOC will be in a much stronger position to promote financial stability and protect consumers’ financial interests,” Neely says. “The new guidance also commits FSOC to rely on the expertise of state insurance regulators in addressing any identified risks. Through robust oversight and regulation, state insurance regulators play a key role in ensuring life insurers’ financial strength. Life insurers’ mission is to provide consumers with financial security and peace of mind through times of prosperity and times of economic stress. FSOC’s new guidance aligns with this mission and will solidify consumers’ confidence in the nation’s financial system.”
A link to the new FSOC “nonbank financial company determination” rules is available here.
—Read Yes. Leave Big Insurer Wellness to Us: NAIC Head on FSOC Proposal, on ThinkAdvisor.