WASHINGTON – The American Council of Life Insurers (ACLI) said its members believe there are flaws in the process for designating non-bank entities, such as insurers, as systemically important financial institutions (SIFIs). So the organization today asked Congress for wholesale changes in that process.
The request was made during a hearing held by the Senate Banking Subcommittee on Securities, Insurance and Investment, aimed at examining insurance capital rules and the Financial Stability Oversight Council (FSOC) process for designating an entity as SIFI.
Daniel Schwarcz, a professor at the University of Minnesota Law School, however, defended the FSOC process, effectively saying “remember AIG.” He said the need for the federal government to rescue AIG put to rest “the historical assumption that such systemic risk is confined to banks and their holding companies is inaccurate in today’s financial world.”
“Instead, firms engaging in a wide variety of financial activities can, in certain circumstances, contribute to the fragility of the financial system in times of general market stress,” Schwarcz said.
Robert M. Falzon, executive vice president and chief financial officer at Prudential Financial, said one key concern insurers have with the SIFI designation process is that it gives each FSOC member an equal vote in determining whether an insurer represents a systemic risk to the financial system. This is even though only one voting member of the FSOC, the one with insurance expertise, understands the industry.
Most of the FSOC members oversee banks, whose risk profile is completely different than that of insurers, Falzon said. He proposed that “special weight should be given to the views of the FSOC member with insurance experience” although he did not state specifically how that would work.
In his testimony, Falzon said that “one of the most important improvements” to the FSOC designation process would be to require that a company under consideration be provided with access to the entire FSOC record.
He explained that a company that advances to the third and final stage of review has no way of knowing what materials FSOC believes are relevant.
“In other words, a company is not provided with the evidentiary record upon which the voting members will make a proposed or final determination,” Falzon said.
In addition, he said, FSOC should have separate staff assigned to its enforcement and adjudicative functions.
For his part, Schwarcz defended the FSOC designation process. He said Congress constructed FSOC’s designation process “to be flexible and adaptive” because systemic risk is complicated and evolving.
“Although this design choice inevitably reduces transparency, FSOC has done a reasonably good job of addressing this concern,” Schwarcz said.
For example, he said, FSOC’s development of a quantitative screen in the first stage of its designation process helps assure the vast majority of nonbank financial institutions that they will not be determined SIFI.
Schwarcz delivered an implied warning against the intense pressure on Congress for major revisions to the FSOC system aimed at limiting its ability to forestall or reduce the risk of catastrophic economic downturns such as occurred in 2008.
Schwarcz said the FSOC approach Congress crafted to identify systemically significant nonbank financial institutions “reflects a key lesson of the financial crisis: that systemic risk can arise in new and distinctive guises due to the massive complexity and interconnections that have evolved, and continue to evolve, within our financial system.”
The ACLI also voiced concern about the proposed Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame).
“The U.S. insurance industry is concerned about the haste with which the ICS (Insurance Capital Standards Act) is being developed, particularly in the context of Congress’ passage into law of the Insurance Capital Standards Act enacted last year,” Falzon said in his testimony to the subcommittee. Falzon also testified on behalf of the American Insurance Association.
“The International Association of Insurance Supervisors timeline must accommodate full implementation of that law and a formal rulemaking process for development of domestic insurance capital standards by the Federal Reserve Board,” Falzon said.
A representative of the property/casualty insurance industry also strongly criticized all aspects of non-state oversight of insurance companies, including oversight of insurance companies that operate savings and loans by the Federal Reserve Board, and initiatives underway to establish international capital standards.
Kurt Bock, CEO of Country Financial, testifying on behalf of the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies, voiced concern about the roles of the Federal Reserve Board and the Federal Insurance Office in overseeing various aspects of insurance activities through the Dodd-Frank Act.
“These new agencies and new federal responsibilities are still being sorted out. But in some cases concerns are growing that the federal agencies are either veering from the intent of Congress or are being pressured to do so internationally,” Bock said.
“While Country Financial and a majority of the members of our trade associations are domestic, all of the members have felt the impact of the international standards being imported to the U.S.,” Bock said. “Indeed, the movement toward more formulaic, one-size-fits-all prescriptive standards is accelerating and threatening both international and domestic-only insurers,” he said.
In his testimony, Bock said that the “The property/casualty industry has serious concerns about recent international standard-setting efforts that have morphed far beyond their original mission to develop best practices or principle-based standards.”
“Instead, these bodies are increasingly trying to extend particular capital standards and accounting practices used by certain regions on a global basis that could significantly undermine the current U.S. insurance regulatory system,” Bock said.
He argued that U.S. regulators “face intense pressure for global convergence” from the Financial Stability Board (FSB), as well as the IAIS, which has adopted in its Insurance Core Principles insurance standards based largely on Solvency II. He calls Solvency II “a new top down, bank-like like regulatory system adopted but not yet implemented by the European Union.”
Bock contended that U.S. state solvency regulation has been “extremely successful, due not only to the structure of the regulation but also to its particular focus on protection of insurance consumers rather than investors and lenders.”
Bock also addressed the Fed’s regulation of insurers like Country which operate thrift holding companies. He said that although Congress preserved the Home Owners Loan Act and a distinct holding company structure to govern savings and loan holding companies differently than bank holding companies, “the Federal Reserve has been continuously assessing how to fit systemically important insurance groups and insurance groups with depository institutions into its bank holding company regulatory system.”
InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].
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