NU Online News Service, Sept. 2, 10:17 a.m. EDT
The American Insurance Association (AIA) is asking international financial-services regulators to reflect U.S. policy and therefore allow state regulators to wind down the insurance subsidiaries of troubled global financial firms.
The AIA’s views were transmitted in an Aug. 23 comment letter to the Financial Stability Board of the Bank of International Settlements (BIS), based in Switzerland.
The BIS is seeking comment on rules outlining recovery and resolution plans for troubled globally systemically important financial institutions, or G-SiFis.
Steven A. Bennett, AIA assistant general counsel, and David Snyder, AIA vice president and associate general counsel, signed the letter.
As an initial step, Bennett and Snyder say that U.S. property and casualty insurers are “extensively regulated under state law” and, as a result, “pose very little risk to the global financial system.”
That’s because, the letter states, “insurance firms do not present leverage to the economy and do not have an infrastructure-maintenance function.”
The most appropriate way of crafting a policy dealing with insolvency of a G-SiFi with insurance subsidiaries is to reflect, in any international policy, the provisions dealing with resolution of insurance companies contained in the Dodd-Frank financial-services-reform law, according to the letter.
The letter says any new international resolution should not displace the current receivership process and state guaranty-fund system already in place for U.S. P&C companies.
The letter also voices concern with a part of the BIS document that says that “to the extent that insurers conduct activities which are bank-like, the application of banking-sector resolution tools to such activities, rather than to the insurer as a whole or to its core traditional insurance business, may be appropriate.”
AIA officials say they agree with the principle that applying non-insurance resolution tools to the regulated business of insurance would not be appropriate or beneficial.
However, because the term “bank-like activities” could cover activities such as investing and lending, AIA officials say they are concerned “that the provision may be interpreted to apply to routine powers exercised by insurers in the ordinary course of business.”
Bennett and Snyder state, “Such a misreading could lead to the inappropriate application of banking resolution procedures to a broad range of activities engaged in by insurance companies.
“We think this might lead to confusion and uncertainty as to what regulatory scheme will apply to which activities of an insurer and could even lead to gaps in regulation,” the letter says.
AIA officials say a better approach would be to recognize that insurance regulators have the responsibility and authority to regulate all activities carried out by an insurance company in connection with the business of insurance.
“Although certainly a consideration, the ultimate question in our view is not whether activities are ‘core traditional insurance business,’ but whether even non-core or non-traditional activities engaged in by an insurance company are subject to adequate supervision and regulation by insurance regulators,” the letter says.
If they are, the letter continues, “then a sounder approach is to subject the insurance institution and all of its regulated activities to the proven effective recovery and resolution provisions that have long been part of U.S. insurance regulation.”