FSOC hones in on insurers' interest rate risk

At the same time, John Nadel, of Sterne Agee & Leach in New York, issued an investor's note indicating that the Federal Reserve Board, which would oversee nonbanks designated as SIFI, is leaning toward adjusting the metrics used to evaluate insurers to reflect the differences between banks and insurers, the same issue raised by Tester and Johanns in their letter.

An FSOC official told reporters on background later that the FSOC is now more focused on interest rate risk for life insurers than in past years. "What has changed is that when interest rates and volatility are low, people increase leverage, the duration of their investments and take on increased risk," the official said.

"I think what we see in the markets in the past year are more signs of risk, for example, very high issuance of high-yield bonds of companies of less-than-stellar quality. There is also concern about weakness in loan underwriting that the agency is focusing on more this year than last, the official said.

The official acknowledged that state regulators are already working to quantify this risk.

The official noted, using the terminology "bucket," or areas of concern, has grown to include very broad areas of operational risk, for example, the use of faster technology in trading and the fact that these activities are being conducted in more markets than in the past. 

See also:

• The coming storm in trust-owned life insurance — and how you can cope
• IMF concerned about US life insurers
• Income and allocation strategies in a time of low rates