The Financial Stability Oversight Council has never been popular with Republicans, but it earned some of its harshest criticism when it designated two insurance companies as systemically important financial institutions last year. Opponents said the majority of FSOC’s members didn’t understand how insurers differ from banks.
But now that some insurance companies are viewed by some in the marketplace as “too big to fail,” some Republican lawmakers and insurance experts are questioning whether the federal government has the expertise to regulate an industry that has traditionally been overseen by state commissions. One of the biggest concerns is that regulators will try to regulate the long-term investments of an insurance company as if they operate with the short-term interests of a bank.
In July 2013, FSOC designated American International Group Inc. and General Electric Capital Corp. systemically important financial institutions, meaning the firms could pose a threat to U.S market stability if they were to fail. Two months later the pair was joined by Prudential Financial Inc., the second-largest insurer in the U.S. All three are now subject to regulation by the Federal Reserve. FSOC’s lone voting member with an insurance background, former Kentucky insurance commissioner Roy Woodall, dissented. He said FSOC’s analysis used scenarios that were “antithetical” to the business of insurance.
Texas Republican Randy Neugebauer, chairman of the House Financial Services Subcommittee on Housing and Insurance, said the designation was indicative of a flawed system.
“Prudential’s direct regulators didn’t think it was systemically important, but the others with no expertise in the insurance industry voted for SIFI designation,” he said last week in an email statement. “They’re not valuing input from the very regulators and experts that actually have substantive knowledge, and this has major consequences for the stability and competitiveness of our economy.”
A bipartisan bill from Sen. Susan Collins (R-Maine) clarifying that bank capital standards do not apply to nonbank institutions could reportedly hitch a ride on unrelated legislation up in front of the Senate Banking Committee this week.
FSOC was established in 2010 as part of the Dodd-Frank law and has statutory authority to initiate federal regulation of nonbank institutions that it says could pose a risk to U.S. financial stability. The council’s 10 voting members include officials such as Treasury Secretary Jacob J. Lew and Debbie Matz, head of the National Credit Union Administration. In addition to Woodall, the council has five non-voting advisors, including the director of the Federal Insurance Office and a state insurance commissioner.
A Treasury spokesperson noted that 20 percent of the members are market regulators and another 20 percent are insurance types. “The argument that the Council lacks insurance representation has no basis in fact, given these numbers,” the spokesperson said last week in an email.
Much of the focus on insurance companies stems from the role AIG played in the financial crisis, which resulted in a $180 billion rescue package from U.S. taxpayers. That company’s association with the fallout from the housing decline made Prudential’s designation all the more surprising to regulatory opponents, who note that the Newark, New Jersey-based insurer never received any of the Troubled Asset Relief Program funds given to Wall Street banks.
Nevertheless, Prudential is now spending money to make ensure it’s capable of adhering to reporting standards for whatever regulations are implemented, be they increased capital requirements or fewer assets considered risky by regulators.
“We are taking the necessary steps and committing the resources necessary to comply with the reporting process,” Bob DeFillippo, a spokesman for Prudential, said in a May 29 phone interview. “There is a cost involved there,” he said, while declining to quantify the amount.
DeFillippo described Prudential’s interactions with the Fed as “productive,” adding that both before and after the firm’s SIFI designation “the regulators were very receptive to the information we were providing. We spent most of that time providing information on how precisely insurance companies are different from banks.”
Those differences include business models that focus on long-term versus short-term risks, as well more of an emphasis on individual versus commercial clients. It isn’t yet clear what regulations, if any, regulators will impose, and specific requirements aren’t expected this year.
“There’s an internal battle, not only in FSOC but also within the Fed, as to how bank-centric do they make these regulations,” said Brandon Barford, a partner at Beacon Policy Advisors LLC in Washington. “They wanted to ensure that such firms didn’t grow larger, but at the same time theydidn’t want to develop new rules in the abstract. The examination process is supposed to help inform the regulations. Despite having this power, I’m not entirely sure they’ve hired and fully staffed up with the experienced people they need to do this.”
During congressional testimony in February, Janet Yellen said the Fed is taking the necessary steps to better understand the insurance field.
“We have consulted with others with greater insurance expertise,” Yellen said. “And of course, we’re building our own expertise as is appropriate. But we absolutely recognize that it’s important to tailor rules to the specific and different business model of insurance companies. They’re not the same as banking organizations. We recognize a number of special issues, including the long-term nature of most insurance company liabilities, the fact that they have asset liability matching practices, risks associated with separate accounts, and so forth.”
While Prudential is already regulated in all U.S. states since it offers insurance policies nationwide, its status as one of the world’s biggest asset managers drew the attention of federal regulators. Prudential has about $1.13 trillion in assets under management, making it the eighth-largest in the world.
“It’s important to note that these companies weren’t just singled out without evidence – FSOC has provided an informative, detailed analysis that paints a picture of their exposure,” Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee, said at a hearing last month. “For example, in the case of AIG, the FSOC determined that a large number of corporate and financial entities have significant exposures in its capacity as a global insurer, and could suffer losses in the event of financial distress at AIG.”
As of now there are no legislative proposals aimed at altering how the regulations are implemented once a firm like Prudential is designated a SIFI. Instead, the GOP focus has been on increasing transparency regarding the SIFI designation process itself and the criteria used to make that determination, the main objectives of a measure introduced in April by Rep. Scott Garrett of New Jersey, chairman of the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises.
A committee markup of Garrett’s bill, H.R. 4387, scheduled for May 29 was postponed due to the death of the ranking member’s mother. Another measure for consideration that day would impose a six-month moratorium on FSOC designating other nonbank institutions as systemically important.
Lew is scheduled to testify before the House Financial Services Committee this month, and the Treasury secretary is expected to face more GOP criticisms of the SIFI designation process.