Insurance industry officials fear "Armageddon" will be theresult of a proposal by the Federal Reserve Board to use"bank-centric" standards in regulating insurance companies thatoperate thrifts.

In a letter to the Federal Reserve Board, the NationalAssociation of Mutual Insurance Companies says the proposals toprovide consolidated regulation of insurance companies represent a"sea change."

In its own letter, Nationwide Mutual Insurance Company says theregulation, if adopted as proposed, "could threaten the existenceof the savings and loan holding company industry."

And the chief financial officers of eight insurance companies,including Nationwide, Mutual of Omaha and USAA, say in a thirdletter that the current proposal would require all insuranceorganizations subject to the Fed's supervision, "regardless ofsize, to meet new minimum capital requirements beginning Jan. 1,2013."

The NAMIC letter says the CFOs' comments "share the concernsexpressed by the Financial Service Roundtable and the AmericanBankers Association in their comment letter on the issue." Includedin the FSR's membership are a number of large, global insurancecompanies. The ABA members include some banks which operate largeinsurance brokerages.

The Fed is proposing the rules as the successor to the Office ofThrift Supervision. The OTS was phased out and its responsibilitiesshifted to the Fed and the Office of the Comptroller of theCurrency through the Dodd-Frank financial services reform law.

That decision was made based on  testimony by theNational Association of Insurance Commissioners, amongstothers,  that the OTS, as the consolidated regulator ofAmerican International Group, was responsible for supervising AIG'sFinancial Products Group, not state regulators.

An amendment to the legislation sponsored by Sen. Susan Collins,R-Maine, specifically mandates consolidated supervision of allnon-banks which operate thrifts by the Fed.

The Fed was forced to bail out AIG in Sept. 2008 after learningthat AIG could not afford to meet margin calls on $2.77 trillion incredit-default swaps AIGFP had issued to insure mortgage-backedsecurities of various qualities held by U.S. securities firms.

At one point in 2009, the Fed had advanced in loans or creditsapproximately $182 billion in cash to keep AIG afloat.

Currently the U.S. position in AIG is being phased out.

In its comments, NAMIC says the Fed has proposed a bankingstandard "that bears no meaningful relationship to the allocationof capital and use of leverage in the insurance world."

The NAMIC comments say the Collins amendment authorizes the Fedto impose a framework that takes into account insurance-basedcapital requirements. "However, the Fed has proposed implementingthe Collins Amendment in a rigid bank-centric manner," the lettercontends.

"As a result, insurers are confronting tremendous and needlessadded uncertainty concerning the rules of the road governingcapital allocation and how capital should be deployed in thefuture."

Moreover, the NAMIC letter says, the "proposals represent a seachange for insurance SLHCs [savings and loan holding companies].NAMIC says insurance SLHCs "would be subjected to an expensive andonerous new quantitative capital regime without fulfilling theintended purpose of assessing the safety and soundness of theSLHC.

"As NAMIC has consistently pointed out, there are fundamentaldifferences between the capital structures and business models ofinsurers and banks. – the different regulatory structures,different underlying business purpose, and the relationship toconsumers," the letter adds.

The Nationwide letter says the company is concerned "that theapplication of an undifferentiated, bank-centric capital frameworkto all organizations with a depository institution, without regardto their predominant line of business or their unique set of risks,raises safety and soundness concerns for SLHCs, makes itincreasingly difficult for SLHCs to serve as a source of financialstrength to their depository institution subsidiaries…and increasesthe threat of systemic risk in the U.S. financial system."

The Nationwide letter was signed by Mark R.Thresher, executive vice president and chief financial officer.

The CFO letter also suggests that because insurance companiesthat have savings and loans have not been regulated by the Fedpreviously, new capital requirements should not be applicable untilJuly 15.

Furthermore, the letter says that the proposed rules wouldrequire the implementation of GAAP accounting standards by Jan.2013, "which is simply infeasible for insurers not currentlyreporting under GAAP (Generally Accepted AccountingPrinciples).

In conclusion, the coalition of chief financial officers askedthe Fed, the Federal Deposit of Insurance Corporation and the OCC"to further study the impact of the proposal and engage theindustry directly to arrive at final regulations that bothstrengthen the economy and appropriately accommodate the businessof insurance."

In separate comments, the American Insurance Association says itis more appropriate to apply the risk-based capital system ofinsurance financial regulation to firms that are engaged in theinsurance business "than to incur the adverse consequencesfrom trying to shoehorn those companies into capital standards thatwere developed for the unique features of bankingorganizations."

Therefore, for those companies with property and casualtyinsurance affiliates that would otherwise be subject to theproposed rules, the AIA "strongly urges" that the agencies"ring-fence the insurance companies and allow them to continue tobe subject to state risk-based capital standards in lieu of theproposed rules," the AIA says in a letter signed by J. StephenZielezienski, senior vice president & general counsel.