The U.S. lawmaker who wrote a Dodd-Frank Act provision that imposes bank-like capital standards on the insurance industry introduced legislation to ease the requirements.
Senator Susan Collins, a Maine Republican, said at a Senate Banking subcommittee hearing Tuesday that her 2010 provision was not intended to subject insurance companies to the same capital and liquidity standards as banks.
“While it is essential that insurers subject to Federal Reserve Board oversight be adequately capitalized,” Collins said at the hearing, “it would be improper, and not in keeping with Congress’ intent, for federal regulators to supplant state- based insurance regulation with a bank-centric capital regime for insurance activities.”
The provision of the Dodd-Frank overhaul of U.S. financial regulation requires the Fed to set minimum capital and leverage standards on non-bank firms, including insurance companies like Prudential Financial Inc.
Collins said insurers engaged in activities regulated as insurance at the state level would be exempted from the Dodd- Frank capital requirements under her bill.
Insurance companies say bank capital standards don’t fit their business and submitted testimony to the subcommittee to press their case for an amendment.
“It’s a difference in the fundamental business model,” Julie Spiezio, senior vice president of insurance regulation and deputy general counsel for the American Council of Life Insurers, said. “It’s like trying to put the safety standards of airplanes on cars.”
Fed Agreement
Federal Reserve Chair Janet Yellen and her predecessor, Ben S. Bernanke, have said they agree that insurance companies should meet different capital standards than banks.
“We recognize that there are very significant differences between the business models of insurance companies and the banks that we supervise, and we are taking the time that’s necessary to understand those differences and to attempt to craft a set of capital and liquidity requirements that will be appropriate to the business model of insurance companies,” Yellen said at a Feb. 27 hearing.
However, Fed officials say the language of Collins’ original provision limits their ability to develop a different capital regime for insurance companies.
‘Some Constraints’
“The Collins Amendment does restrict what is possible for the Federal Reserve in designing an appropriate set of rules,” Yellen said.
Collins said she believes the 2010 provision gives the Fed adequate authority to tailor the requirements to the insurance industry.
“I do not believe legislation is necessary,” Collins said in an interview following her testimony to the panel. “I believe the Fed could have solved this if it wanted to.”
She predicted that her bill and a similar measure by Ohio Democrat Sherrod Brown and Nebraska Republican Mike Johanns would be consolidated into one measure.
“I believe in the end that we are going to come together on a single bill, and that’s my goal,” she said. “We’ve resolved a lot of issues over the past few months, but we still have a couple of issues to come to consensus on.”
The Brown-Johanns bill, which has 23 co-sponsors, has yet to gain approval by the committee.
‘Bipartisan Agreement’
“There is broad, bipartisan agreement that providing traditional insurance is different from banking,” Brown said in an emailed statement Monday. “Capital rules must accurately measure and address the risks of the businesses to which they are being applied.”
Former Federal Deposit Insurance Corp. Chairman Sheila Bair has cautioned against congressional action and said lawmakers should instead wait on the Federal Reserve to act. In a letter to Brown on Monday, Bair said the bill would give insurance companies “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 that contributed to the 2008 crisis.”
President Barack Obama’s administration has previously opposed any legislation to amend Dodd-Frank.
Right Time
“I do recognize the concern about opening up Dodd-Frank when there has not been sufficient time to evaluate its impact,” Rodgin H. Cohen, senior chairman of Sullivan & Cromwell LLP, which represents Metlife Inc. and other insurance companies, said in testimony prepared for the subcommittee. “But, if there were ever to be any change, this is the time an place to do so.”
The Financial Stability Oversight Council last year designated Prudential and American International Group Inc. as systemically important financial institutions, or SIFIs, which would subject them to the Fed’s capital rules. MetLife Inc., the largest U.S. life insurer, has said it’s in the final stage of consideration for the risk tag.
Designation as a SIFI subjects companies to added scrutiny of capital levels, liquidity and leverage from the Fed even as U.S. insurers are primarily overseen by state regulators. MetLife said in its annual filing that being deemed systemically important could limit the company’s ability to pay dividends or repurchase shares.
The need for a taxpayer rescue of AIG in 2008 helped convince regulators that more supervision is needed for nonbank firms. AIG almost failed amid losses in its Financial Products unit, which wasn’t overseen by state regulators.