Insurance regulation headed for a ‘hybrid model’?

Rep. Ed Royce, R-Calif. (AP Photo/Manuel Balce Ceneta)

A spokesman for the life insurance industry today said it is "imperative for Congress" to act promptly to give the Federal Reserve Board the statutory latitude to develop insurance-based capital standards for insurance companies.

The comment by Gary Hughes, ACLI executive vice president and general counsel, was made at a congressional hearing where both life and property casualty industry trade groups urged Congress to promptly pass legislation designed to partly roll back federal authority to oversee or monitor insurance companies enacted as part of the Dodd-Frank financial reform act's efforts to prevent another American International Group collapse.

See also: Insurers take on bank capital requirements

The hearing was held to discuss legislative proposals aimed at "reforming" domestic insurance regulatory policy. It was convened by the Subcommittee on Housing and Insurance of the House Financial Services Committee.

One member of the committee, Rep. Ed Royce, R-Calif., questioned some of the legislative proposals advocated for by representatives of the property casualty insurance industry who testified at the hearing.

Royce said he envisions the "new normal for insurance regulation" being "a hybrid model with layered regulation by states and the federal government."

Royce concluded that "regulation can take place at the federal level but it must be smart and specific to insurance operating models."

The bill Hughes encouraged the panel to report out is H.R. 4510, the Insurance Capital Standards Clarification Act of 2014.

It would clarify Sec. 171 of the Dodd-Frank Act, the "Collins amendment," so that the Federal Reserve Board (FRB) will be allowed to use separate capital standards for insurers and banks under its supervision and to provide that insurers can use statutory accounting principles in filings to the Fed.

Fed lawyers have advised agency officials that the agency is required by Sec. 171 to use Generally Accepted Accounting Principles instead of statutory accounting principles in evaluating the financials of Systemically Important Financial Institutions (SIFI), such as AIG and Prudential Financial, or insurers which operate thrift holding companies.

Hughes testified that in July 2013, the FRB issued final rules implementing bank-centric Basel III for savings and loan holding companies. Recognizing that life insurers should not be held to a banking standard, the FRB issued a temporary exemption for companies that are primarily life insurers.

See also: MetLife offers Basel III alternative

However, the FRB has said it does not have "the statutory latitude to develop insurance-based capital standards for insurance companies," Hughes testified.

"ACLI believes that any consolidated capital standards developed by the Federal Reserve for insurance companies must be insurance-based capital standards modeled on the current insurer risk-based capital system (RBC). RBC was specifically designed by insurance regulators for insurance company entities and is a holistic, comprehensive and accurate measure of their unique risks," Hughes testified.

He said the ACLI "strongly supports" appropriate rules intended to ensure the capital adequacy of insurance companies. He said that the ACLI believes that any consolidated capital standards developed by the Federal Reserve for insurance companies must be insurance-based capital standards modeled on the current insurer risk-based capital system.

He noted that RBC was specifically designed by insurance regulators for insurance company entities and is a holistic, comprehensive and accurate measure of their unique risks.

All U.S. insurance companies currently prepare statutory accounting statements, as is required by law in all jurisdictions, whereas many life insurance companies do not prepare GAAP-based financial statements. "Requiring GAAP-based financial statements coupled with a bank-centric capital adequacy regime would unnecessarily result in an additional and competing set of financials and capital measures for many companies," Hughes said.

Two other bills discussed at the hearing, H.R. 605, The Insurance Consumer Protection and Solvency Act of 2013, and H.R. 4557, the Policyholder Protection Act of 2014, would limit the ability of the Federal Deposit Insurance Corporation to assess insurance companies to pay for failing banks or thrifts, whether they are non-bank SIFIs or troubled institutions that are owned or controlled by insurance companies.

In general, these two bills would require states to agree for an insurance company to be assessed for the insolvency of any troubled financial services company.

Another bill, the Insurance Data Protection Act, proposed by Rep. Steve Stivers, R-Ohio, would limit the authority of the Federal Insurance Office (FIO) and the Office of Financial Research (OFR) to subpoena data from insurance companies. The bill maintains the authority of the FIO and the OFR to subpoena data from insurance companies, but:

1. Must obtain approval from the Secretary of the Treasury,
2. Verify that such data is not available through the insurance company's state regulator, another federal agency, or a public source; and
3. Agree to reimburse insurance companies for the cost of producing the data.

The bill would also require federal entities and state regulators to maintain the confidentiality of nonpublic data obtained from or shared with other federal and state regulators.