Disclosure that the Federal Reserve Board has subjected MetLife to a "stress test" should put to rest any thoughts that the insurance industry has repulsed intervention by federal regulators into their business, a concern that was raised by the near-failure of American International Group.
Hopes that federal regulation had again been thwarted were raised anew when the Treasury Department announced on March 23 that Michael McRaith, current Illinois insurance director, had been named director of the Federal Insurance Office.
Under the Dodd-Frank Act, the FIO only serves as an information-gathering agency on insurance matters. The provision creating the FIO was approved by state regulators and their supporters in Congress.
It specifies that the FIO has no regulatory authority, but it will have the power to monitor all activities related to the business of insurance except for health insurance and long-term-care insurance.
The authority of the FIO to negotiate foreign-trade agreements was also watered down, with proponents of state regulation limiting that power to "covered agreements" and giving states the right to challenge those pacts if they believe the pacts interfere with their regulatory authority—for example, strong consumer protection provisions. The power to negotiate foreign-trade agreements was also watered down through a provision that requires the FIO to share negotiating authority with the U.S. Trade Representative.
Industry officials privately suggest that McRaith, a lawyer, will not be a maverick and will be effective as a liaison between state insurance regulators and the Treasury Department.
They call him a team player who will easily fit into whatever bureaucratic culture exists within the Treasury Department, where the FIO will be housed.
But acknowledgment by MetLife that it underwent a stress test administered by the Fed indicates that the threat of federal regulation will not come from the FIO, but from the Fed and the Financial Stability Oversight Council.
The FSOC has broad authority to not only supervise financial institutions that pose a potential threat to the financial system but also to establish the criteria through which it will determine if a particular institution poses such a threat.
In other words, its powers could include "regulatory authority" over certain insurers, if it saw fit to exercise that authority. And, as stated by Sheila Bair, chairman of the Federal Deposit Insurance Corp., in testimony to the Senate Banking Committee, the FSOC may decide to examine the books of a particular institution to determine if it should be regulated by the Fed.
Readers can interpret as they wish the implication of the Fed's examination of MetLife, which is regarded as one of the most effectively run and solvent insurance-holding companies.
MetLife called the Fed examination a "comprehensive capital analysis and review."
Its spokesman would not comment on reports in The New York Times that MetLife was among a "handful of large banks" that have "encountered resistance from regulators about their plans to increase payouts to investors or buy back stock."
The MetLife spokesman would only say that "our capital distribution activity typically occurs later in the year, and if our board should decide to pursue any such activity, that action will need to be reviewed and approved by the Federal Reserve at that time. Therefore, it is premature to discuss whether we will be able to engage in any such activity at this time."
But the statement that any decision to raise its dividend must be approved by the Fed indicates to this writer that the Dodd-Frank law gives federal regulators broad powers to oversee insurance companies despite language in the FIO provision that will require federal regulators "to seek data from state regulators before imposing costly and burdensome data demands on insurers."
Property and casualty insurers are very much aware that the FSOC has broad powers, and that courts generally support the power of federal agencies to interpret the laws that govern them.
P&C insurers with life units, especially those with thrift charters, know that they are on the radar screen for possible federal regulation based on complexity and interconnection criteria.
In fact, they are gearing up to challenge such designations. For example, the American Insurance Association submitted comment letters last week to the Federal Reserve and the Federal Deposit Insurance Corp. regarding the definitions of "predominantly engaged in financial activities" and "significant" nonbank financial companies and bank holding companies.
The AIA letters caution the agencies that there is a difference between a "significant" nonbank financial company and a "systemically important" nonbank financial company subject to heightened prudential supervision under Dodd-Frank.
In other words, the letters say, size doesn't matter.
Only time will tell if that is true.
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