NU Online News Service, Nov. 24, 11:58 a.m. EST
The Federal Deposit Insurance Corporation should defer to state regulators when involved in the resolution of a systemically risky insurance company, two property and casualty insurance trade groups say in comment letters to the agency.
The FDIC should defer to the states even when seeking repayment on funds loaned by the FDIC to help liquidate a non-insurance subsidiary or affiliate of an insurance company.
The comments by the Property and Casualty Insurers Association of America (PCI) and the American Insurance Association (AIA) deal with a provision of the Dodd-Frank financial services reform law that gives the FDIC the authority to participate in resolving systemically risky insurance companies, in many cases by providing cash up front to help liquidate the firm in an orderly manner.
The PCI and AIA letters focus on using insurance company or policyholder assets to repay the agency in a case where the FDIC makes an advance in order to help liquidate a troubled non-insurance asset of an insurance company.
PCI officials asked the FDIC in its letter "to interpret its resolution authority in a manner that respects state jurisdiction over the resolution of insurance companies."
Specifically, PCI officials said that in taking a lien on a troubled insurance company's assets in order to ensure repayment of its funds to the FDIC after liquidation, the agency should not act unilaterally.
"Under this system, resolution of an insurance company is the responsibility of the appropriate state insurance regulator," the letter states.
"It follows that a determination by the FDIC alone as to the necessity and effect of taking liens on insurance company assets would constitute undue interference with state insurance regulation frameworks," according to the letter.
In its comments on the same provision, the AIA voiced concern that the proposed rule "does not provide a meaningful limitation on the FDIC's authority to take liens on assets of a covered insurance company or its subsidiaries and affiliates consistent" with the law.
"The 'unduly impede or delay' standard set forth in the proposed rule is a very low bar that is easily hurdled," the AIA said.
"The AIA is concerned that the FDIC's broad discretion to provide funding and take liens on any assets of a covered insurance company or covered subsidiary or affiliate could conflict with the resolution plans of the relevant state authority and be inconsistent with what the state authority believes is in the best interests of policyholders," the letter states.
Accordingly, the AIA urged the FDIC to amend the proposed rule to require consultation with and agreement to the proposed funding by the appropriate state authority before exercising its authority to take a lien on the assets of a covered insurance company or its covered subsidiary or affiliate.
The AIA letter argues that "such an approach is consistent with the Dodd-Frank Act's recognition that the resolution of insurance company receiverships should be addressed primarily by the state authority under state law."
In addition, the AIA letter says that "in the event the FDIC takes a lien in connection with an advance it is making, AIA believes that the FDIC should take a lien only on the assets of the entity to which the FDIC made the advance, thereby ensuring that the assets of a covered subsidiary or affiliate are not impaired."
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