Insurers Make Case Against 'Bank-Centric' Rules, but Others Urge Caution

"While it is essential that insurers subject to Fed oversight be adequately capitalized on a consolidated basis, it would be improper, and not in keeping with Congress' intent, for federal regulators to supplant prudential state-based insurance regulation with a bank-centric capital regime for insurance activities," Collins said.

And, to emphasize her point, she disclosed that she had introduced legislation Monday in the Senate, S. 2102, that would exempt insurers regulated from the Fed from those requirements as long as the insurers are engaged in activities regulated as insurance at the state level.

"My legislation also provides a mechanism for the Fed, acting in consultation with the appropriate state-insurance authority, to provide similar treatment for foreign-insurance entities within a U.S. holding company where that entity does not itself do business in the U. S.," she said.

Insurance companies testifying at the hearing voiced strong support for a different standard than that imposed on bank. Those testifying on behalf of such a structure included officials of TIAA-CREF; Nationwide Mutual Insurance Co.; a lawyer representing MetLife; and the director of the Financial Regulatory Reform Initiative, part of the Bipartisan Policy Center.

TIAA-CREF and Nationwide, as well as State Farm, operate large thrifts overseen by the Fed. MetLife is in the last stage of evaluation by the Financial Stability Oversight Council as a potential SIFI.

The industry representatives did, though, implicitly acknowledge the authority of the federal government to have some role in overseeing insurance companies.

Michael W. Mahaffey, chief risk officer for Nationwide Mutual Insurance Company, said, "These institutions are predominantly insurance organizations and it would be inappropriate to measure their capital needs using a tool that is designed for banks.

Gina Wilson, executive vice president and chief financial officer of TIAA-CREF, said she is "particularly concerned about the effects of the rule on our ability to continue providing our clients with a full menu of appropriate and reasonably priced financial services products."

She said imposing a capital framework designed to address the maturity mismatch inherent in banking on an insurer "would create a challenging insurer investment-portfolio consideration where none previously existed." She explained, "Under the rule, certain long-dated investments, which are typically less liquid than shorter-term investments, are discouraged."

Moreover, she said, "Applying these bank capital standards on insurers would also create a disincentive to invest in the very assets that promote stability and solvency best."

H. Rodgin Cohen senior chairman of Sullivan & Cromwell LLP, testifying on behalf of MetLife and other insurers, said, "What is most striking about this question is that I do not know of a single legislator or regulator, including the Fed, who believes that, as a matter of policy," a bank capital framework should be automatically imposed on insurance companies.

"Nor do I know of a single member of Congress who maintains that Congress actually intended to impose the identical capital regime on these two very different businesses," Cohen said.

But Sheila Bair, former chair of the Federal Deposit Insurance Corp., invoked a word of caution. She agreed that the Fed "can and should" craft a capital framework appropriate for insurance products, and should have the discretion to defer to state-insurance regulators in establishing capital standards for the insurance activities which they regulate.

But Bair said, legislation introduced last year (S. 1369) with 22 co-sponsors by Sen. Sherrod Brown, D-Ohio, chairman of the Financial Institutions Subcommittee, and the Collins bill as well, "may unintentionally go beyond legitimate concerns about protecting the integrity of state regulation of insurance."

She said S. 1369 and S. 2102 "would provide a wholesale carve-out from common-sense protections" that would give insurance giants "a significant competitive advantage over banking organizations engaged in the same activities, and leave the door open to the kinds of highly leveraged risk-taking which contributed to the 2008 crisis."

Bair added, "We should not forget that in 2008 AIG was also an insurance company, which took excessive risks in its non-state regulated affiliates."

Daniel Schwarcz, an assistant professor and research fellow at the University of Minnesota Law School, agreed.

"Unlike state risk-based capital rules, which focus primarily on consumer protection, these federal capital standards should focus on the distinctive ways in which insurance SIFIs can pose systemic risk to the larger financial system," Schwarcz said. He said this approach is "perfectly consistent" with the Collins amendment. "I will caution against" exempting bank/thrift holding companies from Sec. 171 simply because they or a large number of their subsidiaries are subject to state insurance-capital requirements. 

"Although the insurance industry is indeed less systemically risky than the banking and shadow-banking sectors, it is also structurally capable of posing a variety of systemic risks to the larger financial system," he said. "Perhaps even more importantly, the magnitude and character of these risks are themselves constantly evolving and shifting."

Schwarcz raised other issues. He said the Fed regulating just SIFIs and insurers with thrifts doesn't go far enough. "I actually believe that there is systemic risk in the insurance industry that may not be captured by that." He noted that the recent report of the Federal Insurance Office pointed out mortgage insurers. "And to me, it doesn't make sense that mortgage insurers are regulated by states."