Ahead of a comment-period deadline, almost two dozen members of the Senate from both sides of the aisle sent a letter to the top federal-banking regulators warning them that the application of a bank-centric capital regime to the insurance industry would fundamentally alter the nature of the business, undermine prudential supervision and unintentionally harm insurance policyholders.
The letter, also sent to the heads of the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC), raised the question of Congress’ intent in designing the rules—namely that insurers should be treated differently in line with their business models.
The issue involves looming capital standards directed at insurers as well as banks from a regulatory smorgasbord of new rules that grew out of the 2010 Dodd-Frank Act (Dodd-Frank).
The Federal Reserve, after Congress interceded in August on behalf of both banks’ and insurers’ lobbying efforts, has already extended its comment period until Oct. 22, 2012 on the proposed rulemaking that would revise and replace current capital rules. The proposals by the Federal Reserve, the FDIC and the OCC would implement the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision, as well as the Collins Amendment (an amendment to Dodd-Frank sponsored by Sen. Susan Collins, R-Maine, that mandates federal regulators impose consolidated capital standards on thrift and bank holding companies that they supervise).
Insurers with thrifts, which number about 25, from medium-sized Midwestern plains insurers with small savings and loans to large life and property companies like Principal Financial, Prudential Financial, TIAA-Cref and State Farm, would be considered Savings & Loan Holding Companies (SLHCs) and will be subject to Basel III international standards for capital and liquidity by the Federal Reserve as a consolidated regulator at the holding-company level.
Insurers have never before been subject to Basel requirements or consolidated capital requirements, and the extremely short transition time is unduly burdensome and contrary to the intent of Congress under the Collins rule, the senators, led by Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns, R-Neb., argue.
“Any final regulations should reflect the will of Congress to respect the distinctions between insurance and banking,” the senators state.
The senators explain that a committee report accompanying the Restoring American Financial Stability Act provided direction to the federal-banking agencies to consider insurance companies’ existing regulatory requirements, accounting treatment, and unique capital structures in developing capital requirements for insurance entities.
The senators also urge the banking regulators to provide insurance companies with an adequate transition period in order to comply with any new capital rules.
“We are concerned that some of the proposed rules, as drafted, do not reflect the distinct nature of the insurance business or take into consideration the state risk-based capital system that was specifically developed for the insurance industry and refined over the past 20 years,” the senators state.
“While we recognize that Dodd-Frank directs the federal-banking agencies to establish minimum capital standards on a consolidated basis, Congress did not intend for federal regulators to discard the state risk-based capital system in favor of a banking-capital regime,” the senators say in the letter.
The senators point to a need for the regulators to acknowledge how insurance companies rely upon long-term assets to fund long-term liabilities while banks use a variety of bonds, equity, and short-term debt to fund their operations.
Insurers have repeatedly made the case that bank liabilities are short-term and assets are long-term while the opposite is true of insurance, which has liquid assets but longer-term liabilities.
Disrupting asset and liability business models would disrupt the insurance industry, insurers caught under the Fed’s new rules have complained.
Jimi Grande, senior vice president of Federal and Political Affairs at the National Association of Mutual Insurance Companies, says, "The concerns raised by Sens. Brown and Johanns are shared by NAMIC and the entire property & casualty insurance industry."
He adds, “Imposing bank-centric standards on insurance companies fails to take into account the significant differences between insurers and banks in financial reporting, accounting standards, capital requirements, and other operational activities...NAMIC has repeatedly cautioned against a 'one-size-fits-all' approach and we are glad to see there is strong bipartisan consensus on Capitol Hill for the Fed to recognize the unique nature of the property & casualty insurance industry."
Other signatories to the senators' letter include: Democratic Sens. Max Baucus, Mo.; Kay Hagan, N.C.; Chuck Schumer, N.Y.; John Tester, Mt.; Robert Menendez, N.J.; Tom Harkin, IA; Richard Durbin, Ill.; Richard Blumenthal, Ct.; Mark Udall, Co.; Jeff Merkley, Or.; Ben Nelson, NE.; and Republican Senators Mike Crapo, ID; Patrick Toomey, Pa.; Pat Roberts, KS; Jerry Moran, KS.; Roy Blunt, MO.; Kay Bailey Hutchison, Tx.; Chuck Grassley, IA.; Johnny Isakson, Ga., and Saxby Chambliss, Ga.