The Financial Stability Oversight Council's plan to inform nonbank financial companies earlier that they're being considered for tighter regulation is a welcomed move, but falls short of addressing a key insurance industry concern.

Instead, the council should decide whether insurers should be considered at all as “significantly important financial institutions” for regulatory purposes, insurance industry experts and observers say.

Thus far, three insurers — American International Group Inc., Prudential Financial Inc. and MetLife Inc. — have received the SIFI designation, meaning they have been deemed too big to fail. MetLife is challenging its designation in a lawsuit filed in mid-January.

Insurers dispute that even the largest property/casualty insurer could present a systemic risk to the financial system as a whole. Since property/casualty insurers are regulated at the state level and covered by state guaranty funds, designating them as SIFIs, and thus subjecting them to heightened regulation by the Federal Reserve, creates problems rather than solving them, insurer groups say.

During the council's meeting in late January, members discussed plans to notify any nonbank financial institution being considered for SIFI designation sooner in the process. The council also plans to make public more details on the designation process itself.

“Designating a firm is not a decision the council takes lightly,” Treasury Secretary Jack Lew said at the meeting.

Although insurance industry observers and experts welcomed the move, they said the proposed liberalization involves procedure rather than substance.

“These changes are aimed at the procedures and the openness,” said Lawrence H. Mirel, a partner in the Washington office of law firm Nelson Brown Hamilton & Krekstein L.L.C., which does business as Nelson Brown & Co., and a former District of Columbia insurance commissioner.

“In that regard, they're moving a step in the right direction,” he said. “What the proposals do not address are the criteria. The companies may know a little more and know it a little earlier, but I think it's still not clear how insurance companies, no matter how large, can be systemic risks or what they can do to avoid being designated a systemic risk.”

“Any improvements in transparency are movements in the right direction,” said David Snyder, a senior vice president in the Washington office of the Property Casualty Insurers Association of America.

Like Mr. Mirel, Mr. Snyder said the proposed changes do not address key issues.

Mr. Snyder said the SIFI designation ought to be based on a company's activities, not its size. In addition, “there needs to be an off-ramp for companies that are designated so they can take certain actions to be undesignated,” he said.

He also said there is a lack of due process when the council agrees to international SIFI designations before conducting its own domestic process.

“I think that FSOC's commitment to telling nonbank financial institutions earlier in the process if they are potential SIFI designees is an acknowledgement the current SIFI designation process creates significant avoidable problems,” Howard Mills, chief adviser in the insurance industry group at Deloitte Services L.L.P. in New York and a former New York insurance superintendent, said in an email.

He cited the “ongoing concern that the insurance industry is being assessed using inappropriate standards that may ultimately lead to adverse effects on consumers.”

Jimi Grande, senior vice president in the Washington office of the National Association of Mutual Insurance Cos., said any increase in transparency is positive, but “as with most things, the devil is in the details, and when they say they will 'make more information available,' it is hard to determine exactly what that means.”

“We believe that FSOC staff's recommendations for enhanced review, company input, and public transparency into the designation process are a step in the right direction and should be adopted by the council without delay,” Stef Zielezienski, senior vice president and general counsel of the American Insurance Association in Washington, said in an email.

“We continue to have concerns that the process to date has yielded flawed designations that overemphasize the potential for systemic risk in the insurance business,” he said.

“I have yet to see how they connect that issue of how an insurance company, however large, can pose a systemic risk if it were to become financially troubled or go belly up,” Mr. Mirel said. “How would that have an impact on the wider financial market?”