Three insurance trade groups are telling federal regulators that insurance investment activities are far less risky than those of banks and should be left to state regulators to oversee.
Comment letters by the American Insurance Association, the Property Casualty Insurers Association of America and the National Association of Mutual Insurance Companies were written in response to a request for comments by the new Financial Stability Oversight Council (FSOC).
The FSOC was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act to monitor financial services companies and ensure that they don't pose a threat to the stability of the financial system.
The FSOC asked for comments regarding how it should craft a study on how the Volcker Rule provision should be implemented.
The provision seeks to impose stronger federal oversight on financial services companies that engage in proprietary trading and enter into joint ventures with hedge funds and private equity funds.
PCI and NAMIC interpreted the exclusion in the Volcker Rule for insurers as only applying to the activities conducted in the insurance general account. But the AIA contended that the exemption applies even for activities conducted outside the general account, so long as those activities support the general account.
Investment activities of insurers are "fundamentally different from the types of activities that are targeted by the so-called 'Volcker Rule' on proprietary trading," PCI officials said.
The PCI letter said that in crafting the Volcker Rule, "Congress also recognized that insurer investment activities are already heavily regulated and closely supervised by state insurance regulators, whose job it is to ensure that insurers licensed in their states remain solvent and able to pay claims."
The letter said state rules are "strict" and they prohibit insurers from making investments that are detrimental to the interests of policyholders.
"In light of these facts, Congress included the Volcker Rule exemption for investments by a regulated insurance company or its affiliates for the general account of the insurance company," the letter noted.
"The exemption is predicated on a requirement that the investments be in compliance with all applicable state insurance investment laws and regulations and that the federal banking agencies do not jointly determine that the existing state investment laws and regulations are insufficient to protect the safety and soundness of the banking entity or the nation's financial stability," the PCI letter said.
NAMIC stated specifically in its letter its view that the exemption for insurers in the provision deals with an insurance company acting on behalf of its general account.
According to the letter, imposing investment limitations on property and casualty insurers structured as mutual thrift holding companies "would have the unintended consequence of severely restricting investment options, including ones that involve minimal risk."
The letter said Congress realized that application of the Volcker Rule to insurance companies would prevent an insurance company from making properly diversified and allocated investments to support their insurance operations and meet their customers' needs.
The letter added that it "would be economically punitive" for insurers if their investment trading were restricted in such a way that they could no longer pursue their long-established basic business models.
At the same time, the AIA interpreted the exemption as also extending to trading by any affiliate of such regulated insurance company, "provided that such activities by any affiliate are solely for the general account of the regulated insurance company."
As a result, the AIA letter stated, while property and casualty insurers do not invest "in any significant way in hedge funds, those investments are lawful and regulated."
The FSOC study, the letter said, "should make clear that [p&c] insurers may–and should–be allowed to continue to make such investments as long as they are consistent with the [p&c] business model and comply with insurance investment laws."
According to the letter, existing insurance investment laws also permit insurers to form and invest through investment subsidiaries, and state insurance regulators have the ability to examine the investment activities of such subsidiaries.
Therefore, the letter said, "Any definition of 'a permitted activity of an insurance company' should, by its terms, acknowledge that [p&c] insurers are empowered to continue their existing investment activities as permitted and regulated under insurance investment laws."
The letter added that many insurance and reinsurance groups of companies also have established subsidiary investment advisors that only manage the assets of the insurance companies and their affiliated companies within the holding company structure.
The AIA contended, "This arrangement is much more efficient for managing excess funds of the group than setting up separate investment divisions within each affiliate."
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