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Insurers keen on Fed's plan for SIFI reform

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The Federal Reserve Board and a leading House Republican want to clarify the way insurers deemed to be systemically important financial institutions are treated, but their proposals take entirely different approaches.

The Fed acted first, releasing an advance notice of proposed rulemaking earlier this month that said it is considering a new approach to apply to systemically important insurers.

“The consolidated approach would categorize an entire insurance firm's assets and insurance liabilities into risk segments, apply appropriate risk factors to each segment at the consolidated level, and then set a minimum ratio of required capital,” the Fed said in a statement.

“I think it is a pretty clear signal to the U.S. insurance industry that their worst fears will not be realized,” said Howard Mills, global insurance regulatory leader at consultant Deloitte L.L.P. in New York. “The Fed appears to be taking a line that comports with U.S. state regulators and is an indication that the Fed is looking out for the U.S. insurance industry with regard to the ongoing debate around global insurance capital standards.”

The Property Casualty Insurers Association of America also praised the move.

The proposal is a “major step forward,” Robert Gordon, PCI's Washington-based senior vice president of policy development and research, said in a statement. “It is important to get this right, as the Fed's approach to capital standards may set a precedent for the state-based U.S. regulatory system and may also impact the international deliberations.”

SIFIs also drew the attention of House Financial Services Committee Chairman Jeb Hensarling. During an address several days later in New York, Rep. Hensarling, R-Texas., outlined details of the Financial CHOICE Act, a Republican plan to replace the Dodd-Frank Wall Street Reform and Consumer Protection Act. CHOICE stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs.

Rep. Hensarling took aim at the Financial Stability Oversight Council, which has the power to designate financial institutions as SIFIs that are subject to heightened capital requirements and reporting rules. Two insurers, American International Group Inc. and Prudential Financial Inc., carry the designation. A third, MetLife Inc., won its court challenge of the designation, but the government is appealing.

“Much criticism has centered on FSOC's lack of transparency,” Rep. Hensarling said in a statement. “But more troubling is its vast powers under a vague mandate.”

“Our Republican reform plan repeals FSOC's authority to designate so-called SIFIs going forward and retroactively repeals FSOC's previous SIFI designations,” he said.

The National Association of Mutual Insurance Companies hailed the proposal.

“I think Dodd-Frank tried to rein in what it saw as an out-of-control Wall Street, but in the process may have created an out-of-control Washington bureaucracy,” said Jimi Grande, senior vice president in NAMIC's Washington office. “I believe the Financial CHOICE Act is an attempt to restore the proper balance to our financial regulatory system. Retroactively repealing the authority of FSOC to designate firms as SIFIs would be one of the most important objectives to restore that balance.”

“Generally, we've always felt that insurance companies were not systemically risky in the first place, and never thought it should apply to insurance companies,” said Wes McClelland, vice president of federal affairs at the American Insurance Association in Washington. Pointing out that Rep. Hensarling has consistently criticized Dodd-Frank, Mr. McClelland also noted that nothing in the Hensarling proposal “directly addresses insurance companies or insurance issues.”

“We're definitely interested in seeing the (legislative) language,” he said. “It never hurts to address any issue,” but he also said that given the congressional schedule, moving a bill this large will probably run into calendar problems.

President Barack Obama has threatened in the past to veto any legislation that made material changes to Dodd-Frank. Presumptive Democratic presidential nominee Hillary Clinton supports Dodd-Frank, while presumptive Republican presidential nominee Donald Trump has said he would dismantle the law.

“There are problems with the way that Treasury has been handling the SIFI designation, but that shouldn't be any reason to get rid of the SIFI concept,” said Lawrence Mirel, a former commissioner of insurance, securities and banking at the District of Columbia and now vice president-director of government affairs for insurance consultant The Goldwater Taplin Group in Washington. “It is at least conceivable that an organization that includes insurers could have a negative impact on the financial system, which is the whole point.”

“You have to be able to regulate an entire group or enterprise,” said William Goddard, a partner in the Hartford, Connecticut, office of Day Pitney L.L.P. who advises clients on insurance regulation. He cited AIG as an example. “Who was watching the whole AIG enterprise (before its near-collapse in 2008)? The Office of Thrift Supervision.”

“Somebody's got to regulate for groups and enterprises, and somebody's got to regulate for systemic interaction,” said Mr. Goddard. “Somebody's got to look out for the health of the financial system as a whole, and somebody's got to look at these large financial enterprises holistically.”