BankThink

U.S. Shouldn't Take a Back Seat in Global Regulation of Insurers

The state-based system of insurance regulation in the United States is the most developed in the world. It should never take a back seat in any deliberation of the industry's future global standards. That is why some recent regulatory actions are so concerning.

In July 2013, the global Financial Stability Board labeled MetLife and Prudential Financial "systemically important" insurers. This occurred before the Financial Stability Oversight Council designated those companies as systemically important financial institutions in the U.S.

Roy Woodall, FSOC's independent member with insurance expertise, raised serious concerns about the timing of the global designations. Woodall noted that the FSB's actions were taken in consultation with members of FSOC, and that these discussions appear to have pre-judged FSOC's independent designation process.

"It is clear to me," he wrote, "that the consent and agreement by some of the Council's members at the FSB to identify MetLife as a [Global] G-SIFI … sent a strong signal early on of a predisposition as to the status of MetLife in the U.S. — ahead of the Council's own decision by all of its members."

He expressed a similar concern with regard to Prudential, saying that the global designation had "overtaken the Council's own determination process."

Woodall's concerns are legitimate. FSOC has a mandate to designate nonbank financial companies based on criteria established by Congress. Its designation decisions should not be predetermined by the actions of the FSB.

The concern over whether the United States is leading or following in financial regulation extends to the capital rules that will be applied to nonbank financial companies designated by the FSOC as SIFIs. Right now, efforts are underway to write insurance capital standards at both the national and international levels. Given that Congress instructed the Fed in the Dodd-Frank Act to draft capital standards for certain U.S. insurers, it is common sense that international regulators should accommodate U.S. standards — not the other way around. And in the same spirit, neither the Fed nor any other U.S. insurance regulator should aim to replace any other jurisdiction's regulatory system.

Just last month, the International Association of Insurance Supervisors released a proposal for higher capital requirements that it plans to finalize by the end of this year. Some industry observers worry that the Federal Reserve's rulemaking process will be short-circuited by a rushed IAIS timeline.

But it's clear that the Fed should proceed normally and allow ample time for public comment. This is not a process that should be rushed. The Fed will likely establish the rules of the road on capital standards for a number of U.S. insurers for years to come. 

Moreover, the U.S. representatives to the IAIS — dubbed "Team USA," comprising state and federal authorities — should not agree to anything that would interfere with a robust and thoughtful rulemaking here in the United States. The IAIS would actually benefit from the work being done by the Federal Reserve, which is staffed by some of the brightest minds in the international financial arena. It should accommodate its timeline for finalizing the capital rules accordingly.

U.S. and international regulators do appear to be in harmony in their treatment of the asset management industry. While individual insurers have been singled out for heightened capital requirements, regulators appear to be pursuing an "activities-based" approach for asset managers that will treat all companies within the industry equally.

FSOC has been very clear on this point. Rather than designate asset managers as SIFIs, it has directed its staff to "undertake a more focused analysis of industrywide products and activities to assess potential risk." This followed the release of a study on asset management and financial security, which was itself followed by a conference "to hear directly from the industry and other stakeholders."

FSOC held no conference for insurers, conducted no in-depth analysis and issued no staff directive to assess the riskiness of activities. Instead, FSOC has pursued the designation of individual insurance companies and provided the public with little insight into the rationale for those designations, how designations could have been avoided, or how dedesignations would work.

The disparate treatment of insurers and asset managers is inexplicable and very concerning. Why has FSOC undertaken a thoughtful analysis of one category of nonbank companies but not another? Why has FSOC apparently concluded that an activities-based approach is appropriate for asset managers but not insurers?

Even one of the principal authors of the Dodd-Frank Act thinks that U.S. regulators need to rethink their approach to nonbanks. In a congressional hearing last year, former Rep. Barney Frank said, "I said a comment to the FSOC, saying as a general principle that I don't think asset managers or insurance companies that just sell insurance as it's traditionally defined are systemically important. They don't have the leverage. Their failure isn't going to have that systemic reverberatory effect."

With any luck, federal and state insurance authorities at home and those negotiating with international regulatory authorities will soon see the same picture. They should seize the opportunity to continue America's leading role in global insurance regulation.

Dirk A. Kempthorne is the president and CEO of the American Council of Life Insurers, a Washington-based trade association.

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