Reprieve for insurers from bank-centric capital rules

An industry lawyer cited the testimony of Michael Gibson, Fed director of the Division of Banking Supervision and Regulation, testified before the House Financial Services Committee May 16 that the agency has "made it clear" in its proposal for enhanced prudential standards that "we do intend to tailor" the standards to the characteristics of the companies that are designated by the Financial Stability Oversight Council (FSOC.)

He said the Fed has proposed a single set of standards that they are applying to both the bank holding companies and the nonbank companies.

"But we have said that once the firms are designated, we will consider tailoring the standards — and the Dodd-Frank Act explicitly gives us the authority to do that," Gibson said.

The new rules will require large banks and to maintain a total capital ratio of 8 percent of risk-weighted assets. It will also allow the Fed to penalize them for excess reliance upon short-term funding; this is an attempt to stem short-term volatility in funding.

"During the public comment period, the American Insurance Association urged the Federal Reserve Board to not apply bank-centric rules to the insurance industry," said J. Stephen Zielezienski, AIA senior vice president and general counsel, in comments consistent with the views of all insurers and trade groups. They waged a multi-front war, through comment letters, visits with Fed officials, and by enlisting members of Congress, in order to persuade federal regulators not to adopt what they describe as "bank-centric" rules on insurers.

He said that, "We are pleased that the board's final rule provides a temporary exemption for savings and loan holding companies that derive more than 25 percent of their total consolidated assets from insurance underwriting activities.

"We hope that, as the board further reviews its action, it will make this exemption permanent so that companies that are actively engaged in the business of insurance and subject to board supervision will not be forced to adopt an inappropriate capital framework that could weaken their ability to compete," Zielezienski said.

"We are still reviewing the entire 972-page rule in-depth, but the rule appears to rightfully acknowledge the unique nature of the business of insurance and excludes companies that are predominantly engaged in it from the greater capital requirements being placed on banks," said Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies.

Grande said that "any capital standards for insurers should consider risk exposures that fit the business of insurance, including asset risk, underwriting risk, interest rate risk and business risk."

Grande also said that "Basel III capital standards that don't fit insurers have no place in insurance solvency supervision.

"The Federal Reserve was told that it was not Congress's intent under Dodd-Frank that federal regulators supplant state-based insurance regulation with a bank-centric capital regime. The rule appears be in accord with these requirements," Grande said.

Specifically, the board said in the final rule that, "After considering the comments received from SLHCs substantially engaged in commercial activities or insurance underwriting activities, the board has decided to consider further the development of appropriate capital requirements for these companies, taking into consideration information provided by commenters as well as information gained through the supervisory process.

"The board will explore further whether and how the proposed rule should be modified for these companies in a manner consistent with section 171 (the Collins Amendment) of the Dodd-Frank Act and safety and soundness concern," the Fed said.

UPDATED With Congressman Miller's statement.