Property/casualty groups hail firm's removal from SIFI list but want moreReprints
Property/casualty insurance groups say they are pleased with the Financial Stability Oversight Council's decision to remove GE Capital Global Holdings L.L.C. from its list of “systemically important financial institutions.”
But, say P/C industry observers, the FSOC's move doesn't go far enough.
Property/casualty insurers have long argued that they don't present a systemic risk to the entire economy like some other financial institutions might. They have also expressed concern that the FSOC has provided no clear “exit ramp” by which insurers designated as SIFIs can escape the designation.
The FSOC was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to monitor the stability of the nation's financial system and to identify those financial institutions that could present a systemic risk to the economy if they became distressed. Currently, only one property/casualty insurer — American International Group Inc. — has been designated a SIFI, subject to enhanced oversight, capital requirement and reporting rules.
Two life insurers — MetLife Inc. and Prudential Financial Inc. — have also been designated SIFIs as well. MetLife, however, successfully challenged its designation in federal court. The federal government is appealing that District Court decision.
Along with the three insurers, GE Capital, which is a commercial lending and leasing operation, was the only nonbank financial institution to be designated a SIFI. On Wednesday, the FSOC announced that it was rescinding the designation.
In a statement, the FSOC said it had designated GE Capital a SIFI in 2013. Since then, “the company has executed significant divestitures, transformed its funding model, and implemented a corporate reorganization,” the FSOC said in a statement. “As a result, the company is a much less significant participant in U.S. financial markets and the economy. The council concluded that these and other changes at GE Capital since the council's determination have significantly reduced the potential for GE Capital's material financial distress to threaten U.S. financial stability.”
“Today's decision clearly demonstrates that the council's designation of nonbank financial companies is a two-way process,” said Treasury Secretary Jacob J. Lew, who chairs the FSOC, in the statement. “The council will remove a designation when that company no longer poses risks to U.S. financial stability. The council follows the facts: When it identifies a company that could threaten financial stability, it acts; when those risks change, the council also acts.”
“One of the consistent reforms that has been needed is the ability to provide a clear exit ramp so companies” can be removed from the SIFI list, said David Snyder, a vice president in the Washington office of the Property Casualty Insurers Association of America. “So we're pleased.”
But the FSOC's move on GE Capital does not go far enough, said Mr. Snyder.
He said there's a need for reform to make clear that property/casualty insurers do not present a systemic risk and “shouldn't be designated but if they are, should have a clear exit. The need for legislation isn't reduced as a result of this action.”
“I think it's positive, it's a step in the right direction,” said J. Stephen Zielezienski, senior vice president and general counsel at the American Insurance Association.
“It looks like what FSOC focused on is GE Capital's change in the way it does business,” he said. “If they're to take that same approach to analyzing the need for continued regulation of insurance SIFIs, it provides some hope that the insurance business model will help those SIFIs make the case that they deserve an exit ramp as well.”
“There is a section already in Dodd-Frank that allows FSOC and others to implement a rule identifying product areas that could be exempt from the designation process," Mr. Zielezienski added. "That might be another route for the federal government to take to clarify as well that (property/casualty) insurance is one of those products that are not prone to generating systemic risk.”
“While GE's de-designation is a good sign that the Financial Stability Oversight Council does not necessarily view designation as permanent, it does not help other entities know what is required for them to also be de-designated,” said Jimi Grande, senior vice president of federal and political affairs in the Washington office of the National Association of Mutual Insurance Companies, in a statement. “Absent a clearly defined off-ramp with specific criteria, SIFIs are still technically at the mercy of the FSOC. Today's decision is a positive step, but it provides scant guidance for other firms that are seeking to shed the designation, or avoid it in the first place. A formal process is still needed to avoid the potential for arbitrary regulation.”