Life Insurers Do Not Pose a Systemic Risk to the Nation’s Economy

Nobody wants a repeat of the financial crisis of 2008. But ill-informed regulation is not the way to go.

In the aftermath of the financial crisis, Congress passed the Dodd-Frank Act. It established a new body of law meant to address systemic risks to our nation’s economy, which included the creation of the Financial Stability Oversight Council (FSOC) to identify systemic risks and respond to emerging threats to financial stability.

The life insurance industry supports the goal of curbing systemic risk. But life insurers are deeply concerned that the statutory mandate is being misapplied.

The FSOC determined that several large insurers, including MetLife, posed a systemic risk to the nation’s economy and designated these insurers as systemically important financial institutions (SIFIs). The FSOC was concerned that life insurers, like banks, face the risk of massive “runs” by policyholders and that such runs pose a systemic risk to the U.S. economy.

The FSOC was mistaken. Life insurers do not pose a systemic risk to the nation’s economy. On the contrary, insurers help support and stabilize the American economy through their investments, their jobs and their support of American families.

Consumers purchase life insurance products for long-term protection and not for short-term liquidity, as is the case with bank demand deposits. Life insurers and banks have fundamentally different business models, financial structures and regulatory regimes. Life insurers’ liabilities are, of necessity, long term and not subject to immediate withdrawal. For life insurers, the risk of a bank-like “run” resulting from loss of consumer confidence is virtually non-existent. History supports this conclusion as was demonstrated in data presented to the FSOC from past insurance company insolvencies and past surrender data, including data from the 2008-2009 financial crisis.

That is why the American Council of Life Insurers (ACLI) strongly supported Judge Rosemary Collyer’s decision earlier this year to rescind the FSOC’s designation of MetLife as a SIFI.

Unfortunately, the FSOC has appealed that decision. So last week ACLI filed an amicus brief with the United States Court of Appeals for the District of Columbia Circuit in support of MetLife.

The FSOC’s decision to designate life insurers as systemically important ignored the overwhelming weight of the evidence presented. Indeed, MetLife submitted over 21,000 pages of information to the FSOC during its review. The opinion of the independent voting member of the FSOC was rejected, as well as input from state insurance regulators.

It also failed to recognize and understand the existing state regulation of the life insurance industry.

Dodd-Frank explicitly requires the FSOC to give reasoned consideration to an institution’s existing regulatory authority before deciding whether to impose an additional, and potentially very costly, layer of federal supervision. For life insurance companies, this required the FSOC to carefully assess the efficacy of state insurance regulation – a requirement which, at best, the FSOC casually glossed over.

Had the FSOC done its due diligence in this regard, it would have encountered a regulatory system totally capable of mitigating risk and protecting companies’ ability to satisfy obligations to policyholders. Indeed, the fact that life insurers weathered the financial crisis well – and certainly better than other federally regulated financial firms – bares out the shortcomings of the FSOC’s analytical process and the correctness of Judge Collyer’s decision.

Lastly, the FSOC reached a designation of MetLife based on vague standards and unreasonable assumptions. As Judge Collyer noted, the FSOC did not consider MetLife’s vulnerability to financial distress despite having adopted a regulation saying it would do so.

Courts have found that actions by federal agencies are considered arbitrary and capricious if they are not “the product of reasoned decision-making.” An agency fails to satisfy that standard when it “fail[s] to consider an important aspect of the problem.” Judge Collyer held that the FSOC’s “Final Determination hardly adhered to any standard when it came to assessing MetLife’s threat to U.S. financial stability.”

Imposing new and significant regulatory burdens on insurers without adequate justification harms their ability to fulfill their mission of financially protecting America’s families. The appeals court should reject the FSOC’s appeal without delay.


Dirk Kempthorne is president and chief executive officer of the American Council of Life Insurers (ACLI), a Washington, D.C.-based trade association representing approximately 280 life insurance companies operating in the United States and abroad.

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