FDIC Resolution Rule Causes Concern

A regulatory lawyer raised concerns about a new proposed FDIC rule dealing with resolving troubled insurers that the federal agency believes constitute potential systemic risk to the financial system.

Francine L. Semaya, a New York-based insurance regulatory attorney, fears the proposed regulation is an example of how the Dodd-Frank Act will impose federal regulation on the business of insurance.

She noted that the proposed regulation says that state insurance law will continue to govern a financially troubled or insolvent insurance company, but at the same time only allows 60 days for the domiciliary regulator to seek a court order to resolve the financial issues facing such a company.

If not, then the Federal Deposit Insurance Corporation has the authority to get appointed as the receiver.

"It has been documented that 60 days is clearly not enough time to 'resolve a troubled company,' particularly if you are working with a national property and casualty insurer with long-tail business," Ms. Semaya said.

She noted that a regulator has two primary goals–protection of policyholders, claimants and the public, and protecting the assets of the insurer.

"Not every financially troubled company needs or should be placed in receivership, whether that procedure is a rehabilitation or liquidation," argued Ms. Semaya, who chairs the Federal Involvement in Insurance Regulation Modernization Task Force of the Tort Trial and Insurance Practice Section of the American Bar Association.

Under the right set of circumstances a troubled company, "if discovered early enough, can be turned around or at least survive in a controlled run-off procedure," said the lawyer, who is also the immediate past president of the International Association of Insurance Receivers.

"Obviously, with the FDIC looking over the state regulator's shoulder, a state regulator might feel compelled to move to protect a troubled insurer from federal involvement by placing it in premature receivership," she said, referring to the need to take quick action within the 60-day timeframe.

Of greater concern, she said, is the uncertainty that once a domiciliary regulator takes regulatory action against a financially troubled insurer and places it in receivership, "will the FDIC then interfere with the orderly process of the rehabilitation and liquidation process?

"The state receivership process, although not perfect and sometimes too lengthy, for the most part is effective in the protection of policyholders, claimants and the public," Ms. Semaya said.

The FDIC rule was published for comment on Oct. 19.

The rule states specifically that the FDIC will not interfere with the state resolution of a troubled insurance company–even non-insurance subsidiaries–except under extremely limited circumstances.

This will include making the troubled insurance company's policyholders whole, the FDIC said.

But, the FDIC does say in the rule that the law gives it the power to liquidate a subsidiary or affiliate (including a parent entity) of an insurance company, where such subsidiary or affiliate is not itself an insurance company.

Specifically, the FDIC said it is proposing that "it will not unduly impede or delay the liquidation or rehabilitation" of an insurance company it deems systemically risky, "or the recoveries by its policyholders."

The proposed regulation is 12 CFR Part 380.

The proposed regulation implements a provision of the Dodd-Frank Act that gives the FDIC the authority to take over and shut down non-bank financial companies, including insurance companies.