Would you consent to have your life or health insurer monitor your condition via a "wearable" device?
By Cyril Tuohy
The life insurance industry and a legal expert on domestic insurance policy reform testified in favor of a bill that would clarify capital requirements to insurance companies subject to Federal Reserve Board supervision.
The bill, H.R. 4510, is also known as the Capital Standards Clarification Act of 2014. It would not require the Fed, when establishing risk-based capital standards, to include assets and liabilities of companies offering insurance operating under state-based capital requirements.
Insurers, represented by the American Council of Life Insurers (ACLI), have lobbied for the bill to make sure they are not subject to similar capital requirements as banks. Sponsored by U.S. Rep. Gary Miller, R-Calif., and U.S. Rep. Carolyn McCarthy, D-N.Y., the bill was introduced in the House in April.
“ACLI adamantly and strongly opposes any application of bank-centric capital standards such as Basel II to life insurance companies,” Gary E. Hughes, ACLI executive vice president and general counsel, said in testimony before a panel of the House Committee on Financial Services.
The Dodd-Frank Act, passed in the wake of the 2008 financial crisis as a measure to tighten regulation on financial institutions, gave the Fed authority over savings and loan holding companies, and authorized the Fed to supervise nonbank financial companies.
Two members of the ACLI have been designated as “systemically important” companies to the nation’s financial system, and therefore subject to Fed oversight. A third insurer is under review for possible designation as systemically important.
In addition, 12 of the ACLI’s member life insurance companies’ own thrifts and are subject to bank company oversight by the Fed, as required in Section 171 of the Dodd-Frank Act. These 12 companies would also be subject to Fed standards.
“ACLI adamantly and strongly opposes any application of bank-centric capital standards such as Basel III to insurance companies,” Hughes said.
Insurance companies need capital standards that are appropriate for insurers and based on an insurer-centric risk-based capital system developed by insurance regulators not banking authorities, Hughes added.
Daniel Schwarcz, an associate professor at the University of Minnesota Law School, supported the clarification measures of the Fed’s authority to tailor capital rules to the particular risks of insurance companies.
“Mechanistically applying bank capital rules to insurers would be poor public policy,” he said.
Capital rules for federally-regulated insurance companies should be tailored to prevent systemic risk in insurance. “As I understand HR 4510, it would preserve the Fed’s ability to devise capital rules that accomplish this,” he said.
However, Schwarcz said a provision within the bill would “unnecessarily curtail” the ability of Fed regulators to ask for information from insurers whose financial statements are prepared using only Statutory Accounting Principles (SAP).
SAP focuses on individual insurance subsidiaries; it does not paint a financial picture of the entire company at the holding company level. As a result, it’s difficult for regulators and analysts to get a holistic picture of an insurer’s financial health, Schwarcz said.
Groupwide assessments of an insurance company’s financial condition are essential for systemic risk regulation because business priorities are determined at the holding company level, Schwarcz also said.
American International Group, which had to be bailed out by the government after it had to pay claims against defaulting mortgages, was the poster child of opaque, turgid reporting requirements where it was difficult to get a picture of its overall financial health.
“Categorically preventing the Fed from demanding information outside of the SAP framework also severely inhibits the agency’s ability to proactively identify and respond to new or emerging potential sources of systemic risk in insurance,” he said.
Citing another example, this one involving the use of captives, Schwarcz outlined more shortcomings of SAP, which incorporate state regulation on reserving for liabilities. Reserving, which is regulated by the state insurance departments, is critical because it gives an insurer a financial cushion from which to pay claims.
Life insurance companies, however, are shifting their liabilities onto their captive insurance companies, which allow insurers to lower reserves. Captives function as in-house reinsurance companies for big insurance carriers that reinsure their liabilities through the captive, thereby lowering their reserve allocations.
Schwarcz also said that state insurance regulation is “moving to a system that would grant life insurers broad discretion to use internal models to set reserve levels,” a process that would make it difficult to piece an overall picture of an insurer’s health.
“In order for federal regulators to monitor these developments for systemic risks, they must be able to demand financial information in forms that may depart from SAP,” he said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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