Insurance companies will urge U.S. lawmakers today to stop the Federal Reserve from imposing bank-like capital standards on their industry.
A provision of the 2010 Dodd-Frank Act that overhauled U.S. financial regulation requires the Fed to set minimum capital and leverage standards on non-bank firms, including insurance companies like Prudential Financial Inc.
Insurance companies say bank capital standards don't fit their business and will press their case for an amendment to the provision at a Senate Banking subcommittee hearing on the insurance industry requirements today.
"It's a difference in the fundamental business model," Julie Spiezio, senior vice president of insurance regulation and deputy general counsel for the American Council of Life Insurers, said. "It's like trying to put the safety standards of airplanes on cars."
The industry's argument won support from the author of the Dodd-Frank capital provision, Senator Susan Collins, a Maine Republican who said in letters last year that she didn't intend for the Fed to subject insurance companies to bank standards. Collins is set to testify at the hearing today.
Federal Reserve Chair Janet Yellen and her predecessor, Ben S. Bernanke, have said they agree that insurance companies should meet different capital standards than banks.
"We recognize that there are very significant differences between the business models of insurance companies and the banks that we supervise, and we are taking the time that's necessary to understand those differences and to attempt to craft a set of capital and liquidity requirements that will be appropriate to the business model of insurance companies," Yellen said at a Feb. 27 hearing.
However, Fed officials say the language of the Collins amendment limits their ability to develop a different capital regime for insurance companies.
"The Collins Amendment does restrict what is possible for the Federal Reserve in designing an appropriate set of rules," Yellen said. "So it does pose some constraints on what we can do, and we will do our very best to craft an appropriate set of rules subject to that constraint."
A Senate bill that would exempt certain insurers from the Fed's capital requirements and return them to the jurisdiction of state regulators was introduced last year by Ohio Democrat Sherrod Brown and Nebraska Republican Mike Johanns. The bill, which has 23 co-sponsors, has yet to see movement.
"There is broad, bipartisan agreement that providing traditional insurance is different from banking," Brown, who is leading today's hearing, said in an e-mailed statement yesterday. "Capital rules must accurately measure and address the risks of the businesses to which they are being applied."
Former Federal Deposit Insurance Corp. Chairman Sheila Bair has cautioned against congressional action and said lawmakers should instead wait on the Federal Reserve to act. In a letter to Brown yesterday, Bair said the bill would give insurance companies "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."
President Barack Obama's administration has previously opposed any legislation to amend Dodd-Frank.
"I do recognize the concern about opening up Dodd-Frank when there has not been sufficient time to evaluate its impact," Rodgin H. Cohen, senior chairman of Sullivan & Cromwell LLP, which represents Metlife Inc. and other insurance companies, says in testimony prepared for the subcommittee. "But, if there were ever to be any change, this is the time an place to do so."
An amendment to the capital provision would probably be welcomed even by the Fed, according to Jaret Seiberg, policy analyst at Guggenheim Securities LLC's Washington Research Group.
"The Fed would like Congress to eliminate this headache for it," Seiberg said. "Barring that, our view is the Fed will find enough discretion to avoid imposing on insurers a capital regime that could be so onerous that it might lead to safety and soundness troubles rather than resolve those concerns."
Under the Collins amendment "life insurers would get exactly what they don't want: A 'bank centric' model for regulating the capital of life insurers," Eric Berg, an analyst at RBC Capital Markets, wrote in a research note yesterday. He wrote that even if legislation clarifying the Collins provisions could move, the Fed would then need to turn to resolving the details of how a life-insurer-oriented capital model would work.
The Financial Stability Oversight Council last year designated Prudential and American International Group Inc. as systemically important financial institutions, or SIFIs, which would subject them to the Fed's capital rules. MetLife Inc., the largest U.S. life insurer, has said it's in the final stage of consideration for the risk tag.
Designation as a SIFI subjects companies to added scrutiny of capital levels, liquidity and leverage from the Fed even as U.S. insurers are primarily overseen by state regulators. MetLife said in its annual filing that being deemed systemically important could limit the company's ability to pay dividends or repurchase shares.
The need for a taxpayer rescue of AIG in 2008 helped convince regulators that more supervision is needed for nonbank firms. AIG almost failed amid losses in its Financial Products unit, which wasn't overseen by state regulators.
Currently, capital requirements for insurance companies are imposed by state regulators. There was no federal consolidated capital requirement for subsidiaries and affiliates of insurance companies prior to Dodd-Frank.
The Fed adopted final capital rules for banks in July, and deferred their application to insurance companies until it could consider how to devise appropriate capital requirements for the industry that are consistent with Dodd-Frank.
Steve Kandarian, MetLife's chief executive officer, has said his company doesn't pose a threat to the U.S. financial system. Still, the insurer has been advocating for SIFI rules that take into account the long-term nature of life insurance liabilities.
"We are concerned about the risk of bank-centric capital rules," Kandarian said last month on a conference call with analysts. "We continue to make the case that if designated, applying bank-centric capital rules to the business of insurance would constrain our ability to issue guarantees and increase the cost of financial protection for consumers."