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Property/casualty insurers may dodge FSOC scrutiny

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WASHINGTON—Property/casualty insurance groups are greeting as good news the Financial Stability Oversight Council's proposal on assessing nonbank financial companies to determine whether they present a systemic risk to the U.S. economy.

But they would like FSOC to go a step further and simply say that property/casualty insurers should not be included in the category of nonbank financial institutions that can prove to be systemically risky.

Property/casualty groups have long argued that their very nature precludes them from creating a systemic risk and that asset size alone should not determine whether such a risk exists.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires that financial institutions deemed to present a systemic risk to the economy be subject to heightened regulation.

An outline of the proposed guidance discussed last week during an FSOC meeting described a three-stage process. Under the process, the FSOC would apply a uniform quantitative threshold to identify a “subset” of nonbank financial companies that warrant further review.

Such U.S. companies would have to have at least $50 billion in global assets or a foreign company would have to have the same amount in U.S. assets to be considered for examination. In addition to meeting the asset threshold, the entity would have to meet one of several criteria:

• Have at least $30 billion in notional credit default swaps;

• Have at least $20 billion in outstanding debt;

• Have at least $3.5 billion in derivatives liability; or

• Have a minimum 15-1 assets-to-equity leverage ratio.

An assessment of companies identified in the first stage would be conducted based on public and regulator data. The third step would be to contact the individual companies that warrant additional review.

Members of the FSOC stressed that nothing has been formalized yet. “It is still a proposal,” said Mary Schapiro, chairman of the Securities and Exchange Commission and a member of the FSOC.

The proposal's impact on insurers of any kind could be limited.

For example, New York-based investment bank Keefe Bruyette & Woods Inc. said that out of nine life insurers with more than $50 billion in assets, only two—MetLife Inc. and Prudential Financial Inc.—would meet those thresholds.

Property/casualty insurers say that while they would have preferred that the FSOC spelled out that they would not fall into the ranks of entities that could present a systemic risk, they welcomed the FSOC's move.

“Ideally, we'd love a flat-out statement that P/C insures don't present a systemic risk,” said J. Stephen Zielezienski, senior vp and general counsel of the American Insurance Assn. in Washington.

He also said that AIA has long said that size should not be the sole factor in determining systemic risk.

“This guidance suggested that while size is a required threshold at Stage 1, it is not the sole factor for that screening process,” Mr. Zielezienski said.

“I think Stage 1 provides quantifiable metrics that should help all nonbank financial companies determine whether or not they will be screened out of the designation process at Stage 1,” he said.

He said that while the second and third stages “don't provide a lot of additional clarity,” if the criteria are applied in a “fair and reasonable way, I don't expect property/casualty insurers involved in traditional insurance activity to be a target.”

He added, though, that many details need to be checked and confirmed.

“For property/casualty insurers, it's good news,” said Ben McKay, senior vp in the Property Casualty Insurers Assn. of America's Washington office.

“It recognizes the fact that property/casualty insurance is not systemically risky,” he said.

But he said PCI would like to see changes to the rule, notably adding cyclicality as a criterion. He said property/casualty insurers tend not to be cyclical with economic downturns, unlike some other financial institutions. “As the economy goes down, the stock market goes down and banks tend to fail. But when the market goes down, you don't see the same thing in insurance companies. Our sources of income are more steady.” He called the omission “particularly problematic.”

He said PCI's other concern is that “a lot of this language we're so pleased with is actually in the guidance but not in the rule.” He said PCI would like to see the language codified in the rule.

“It's a lot easier to change guidance,” said Mr. McKay. “Guidance is just guidance, and it's a lot harder to change a rule.”

“While a clear statement that the FSOC did not intend to look at property/casualty insurers would have been preferable,” the National Assn. of Mutual Insurance Cos. believes the “framework for assessing both a company's vulnerability to financial distress and its potential impact on the broader economy will conclude that no property/casualty insurance company should be designated as a systemically significant financial institution,” Jimi Grande, senior vp in NAMIC's Washington office, said in a statement.

“To the extent the minimum quantitative thresholds create a clear distinction with regards to what the FSOC believes makes a financial institution "systemically important,' the proposed framework is a positive first step,” Mr. Grande said.