Ahead of a comment-period deadline, almost two dozen members ofthe Senate from both sides of the aisle sent a letter to the topfederal-banking regulators warning them that the application of abank-centric capital regime to the insurance industry wouldfundamentally alter the nature of the business, undermineprudential supervision and unintentionally harm insurancepolicyholders. 

The letter, also sent to the heads of the FederalDeposit Insurance Corporation (FDIC) and the Office of theComptroller of the Currency (OCC), raised the question of Congress'intent in designing the rules—namely that insurers should betreated differently in line with their business models.

The issue involves looming capital standards directed atinsurers as well as banks from a regulatory smorgasbord of newrules that grew out of the 2010 Dodd-Frank Act (Dodd-Frank).

The Federal Reserve, after Congress interceded in August onbehalf of both banks' and insurers' lobbying efforts, hasalready extended its comment period until Oct. 22, 2012on the proposed rulemaking that would revise and replacecurrent capital rules. The proposals by the Federal Reserve, theFDIC and the OCC would implement the Basel III regulatory capitalreforms from the Basel Committee on Banking Supervision, as well asthe Collins Amendment (an amendment to Dodd-Frank sponsored by Sen.Susan Collins, R-Maine, that mandates federal regulators imposeconsolidated capital standards on thrift and bank holding companiesthat they supervise).  

Insurerswith thrifts, which number about 25, from medium-sizedMidwestern plains insurers with small savings and loans to largelife and property companies like Principal Financial, PrudentialFinancial, TIAA-Cref and State Farm, would be considered Savings& Loan Holding Companies (SLHCs) and will be subject to BaselIII international standards for capital and liquidity by theFederal Reserve as a consolidated regulator atthe holding-company level.  

Insurers have never before been subject to Baselrequirements or consolidated capital requirements, and theextremely short transition time is unduly burdensome and contraryto the intent of Congress under the Collins rule, the senators, ledby Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns,R-Neb., argue.

"Any final regulations should reflect the will of Congress torespect the distinctions between insurance and banking," thesenators state.

The senators explain that a committee report accompanying theRestoring American Financial Stability Act provideddirection to the federal-banking agencies to consider insurancecompanies' existing regulatory requirements, accounting treatment,and unique capital structures in developing capital requirementsfor insurance entities. 

The senators also urge the banking regulators to provideinsurance companies with an adequate transition period in order tocomply 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 ortake into consideration the state risk-based capital system thatwas specifically developed for the insurance industry and refinedover the past 20 years," the senators state. 

"While we recognize that Dodd-Frank directs the federal-bankingagencies to establish minimum capital standards on a consolidatedbasis, Congress did not intend for federal regulators to discardthe state risk-based capital system in favor of a banking-capitalregime," the senators say in the letter.

The senators point to a need for theregulators to acknowledge how insurance companies rely uponlong-term assets to fund long-term liabilities while banks use avariety of bonds, equity, and short-term debt to fund theiroperations. 

Insurers have repeatedly made the case that bankliabilities are short-term and assets are long-termwhile the opposite is true of insurance, which has liquidassets but longer-term liabilities. 

Disrupting asset and liability business models would disrupt theinsurance industry, insurers caught under the Fed's new rules havecomplained. 

Jimi Grande, senior vice president of Federal and PoliticalAffairs at the National Association of Mutual Insurance Companies,says, "The concerns raised by Sens. Brown and Johanns areshared by NAMIC and the entire property & casualty insuranceindustry." 

He adds, "Imposing bank-centric standards on insurance companiesfails to take into account the significant differences betweeninsurers and banks in financial reporting, accounting standards,capital requirements, and other operational activities…NAMIC hasrepeatedly cautioned against a 'one-size-fits-all' approach and weare glad to see there is strong bipartisan consensus on CapitolHill for the Fed to recognize the unique nature of the property& casualty insurance industry."

Other signatories to the senators' letterinclude: 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.;  RichardBlumenthal, 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.