Sen. Susan Collins, R-Maine, today unequivocally supported the insurance industry's contention that the Federal Reserve Board was wrong in seeking to impose "bank-centric" rules on insurers subject to Fed regulation.
She testified before a Senate committee that her amendment to the Dodd-Frank Act dealing with minimum capital standards for bank and thrift holding companies regulated by the Fed does not require the Fed to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities.
Two types of insurers are overseen by the Fed:
- Systemically significant financial institutions, or SIFIs, such as American International Group and Prudential Financial, and most likely, MetLife; and
- Insurers which operate savings and loans and come under Fed supervision as their consolidated regulator.
She said that her amendment "allows the federal regulators to take into account the distinctions between banking and insurance, and the implications of those distinctions for capital adequacy," a point with which the Fed, especially its lawyers, disagree.
See also: Fed role in insurance oversight a given
"While it is essential that insurers subject to Fed oversight be adequately capitalized on a consolidated basis, it would be improper, and not in keeping with Congress's intent, for federal regulators to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities," Collins said.
And, to emphasize her point, she disclosed that she had introduced legislation Monday in the Senate, S. 2102, which would exempt insurers regulated from the Fed from those requirements as long as the insurers are engaged in activities regulated as insurance at the state level.
Collins made her comments in testimony before two subcommittees of the Senate Banking Committee: The Financial Institutions and Consumer Protection and Securities, Insurance and Investment Subcommittees.
"My legislation also provides a mechanism for the Fed, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company where that entity does not itself do business in the U. S.," she said.
Insurance companies testifying at the hearing voiced strong support for different standards, and argued that the Fed has sufficient authority under the Collins amendment, Sec. 171, to do so. Those testifying in support of a different standard than that imposed on banks included officials of TIAA-CREF, Nationwide Mutual Insurance Co., a lawyer representing MetLife, and the director of the Financial Regulatory Reform Initiative, Bipartisan Policy Center. TIAA-CREF and Nationwide, as well as State Farm, operate large thrifts overseen by the Fed. MetLife is in the last stage of evaluation by the Financial Stability Oversight Council as a potential SIFI.
But, a note of caution was invoked by Sheila Bair, former chairman of the Federal Deposit Insurance Corp. She agreed that the Fed "can and should" craft a capital framework appropriate to insurance products, and should have the discretion to defer to state insurance regulators in establishing capital standards for the insurance activities which they regulate.
But, Bair said, legislation that S. 1369, legislation introduced last year with 22 co-sponsors by Sen. Sherrod Brown, D-Ohio, chairman of the Financial Institutions Subcommittee, and the Collins bill as well, "may unintentionally go beyond legitimate concerns about protecting the integrity of state regulation of insurance."
She said S. 1369 and S. 2102, which does the same thing, "would provide a wholesale carve-out from common sense protections" contained in Sec. 171.
This would give insurance giants "a significant competitive advantage over banking organizations engaged in the same activities, and leave the door open to the kinds of highly leveraged risk-taking which contributed to the 2008 crisis.
"We should not forget that in 2008 AIG was also an insurance company, which took excessive risks in its nonstate regulated affiliates," Bair said.
Daniel Schwarcz, an assistant professor and research fellow at the University of Minnesota Law School, agreed.
"Unlike state risk-based capital rules, which focus primarily on consumer protection, these federal capital standards should focus on the distinctive ways in which Insurance SIFIs can pose systemic risk to the larger financial system," Schwarcz said.
He said this approach is "perfectly consistent" with the Collins amendment. "I will caution against" exempting bank/thrift holding companies from Sec. 171 simply because they or a large number of their subsidiaries are subject to state insurance capital requirements, Schwarcz said.
"Although the insurance industry is indeed less systemically risky than the banking and shadow banking sectors, it is also structurally capable of posing a variety of systemic risks to the larger financial system," he said. "Perhaps even more importantly, the magnitude and character of these risks are themselves constantly evolving and shifting."
Schwarcz raised other issues. He said the Fed regulating just SIFIs and insurers with thrifts doesn't go far enough. "I actually believe that there is systemic risk in the insurance industry that may not be captured by that." He noted that the recent report of the Federal Insurance Office pointed out mortgage insurers. "And to me, it doesn't make sense that mortgage insurers are regulated by states."
