With SIFI Designations Due, Dual Regulation Could Become a Reality
Insurance Experts' Forum, March 22, 2013
As the Financial Stability Oversight Council (FSOC) is set to release its designations for non-bank systemically important financial institutions (SIFIs), the industry’s largest players—from both the P&C and life sectors—eagerly await a final word. It’s been a long process, and when AIG came out last fall declaring it was under consideration and that the company would not contest such a designation, the potential reality of insurers seeing federal regulation set in.
The latest word from the International Association of Insurance Supervisors (IAIS) is that insurers will face less strict rules than their banking counterparts. This certainly bodes well for U.S. insurers, as one of the FIO’s goals seems to be to equate international designation standards with national regulatory rules; but that doesn’t necessarily mean the industry-specific guidelines will be lax.
In anticipation of the announcement, I spoke with Howard Mills, director and chief advisor of Deloitte’s insurance industry group and former New York State Insurance superintendent, about some of the last-minute speculation and what options insurers will have if designated.
What’s the status on the designations—when can we expect to see them and what do you expect them to indicate?
They’re moving toward handing down the decision shortly. People have been waiting so long and working for quite some time, so I think we’ll see it soon. And from what we’re seeing, it could be a very significant development if the messaging out of the IAIS is that there is, indeed, a difference between insurance and banking, and that traditional insurance activities don’t pose systemic risk. That is certainly what many people in the insurance community are hoping to see, and I think it would be a very strong message to U.S. regulators if that was the case.
How has the designation process worked? Which organizations have been most involved?
Well the FIO has been very active behind the scenes. Their public pronouncements have been very, very few and we’re still waiting on the report obviously. But FIO Director [Michael] McRaith has been very active. He’s been participating in all the international meetings, and I think they actually have a very strong presence and are making an impact.
Otherwise it’s been mostly the IAIS [International Association of Insurance Supervisors]?
Well, the IAIS has obviously been involved through the traditional committees and organizations; the NAIC has been very involved; state insurance commissioners have been getting very involved internationally; and the industry has been very active watching this—and more than watching, actively participating and lobbying where they can, as have the various trade representatives of the industry. So there’s been plenty of input.
With so many people wanting a say, what’s at stake here?
What’s at stake for any insurer that is designated to be a SIFI is dual regulation. There’s been concern in the industry that we’re evolving into a dual regulatory environment. In that, the state regulatory authorities are going to remain and the fed is going to get more involved to some degree. Any insurer that’s designated a SIFI immediately moves into the reality of a dual regulatory environment. They’ll be regulated by the federal government, under the oversight of FSOC, and also still remain regulated by the states. It’s pretty well known who’s being considered, the big companies that are on the list. Just think of the top two or three biggest life insurers, the top two or three biggest P&C insurers—those are the candidates.
Do we know how the timeline will look once the designations are handed down and what potential SIFIs will have to do in response?
They’ll certainly have a process and things to do, but any insurer that has a realistic possibility of being designated a SIFI, they’ve been preparing. I would imagine that with a SIFI designation would come clarifications from FSOC [the Financial Stability Oversight Council] in terms of a timeline and when those things need to be done by.
Are there going to be any actions an insurer can take after being designated a SIFI to try to reverse the decision or get the designation dropped?
Well, for example, we already have seen some insurers looking at things like divesting themselves of banks or thrift holding companies. But I think that before we can answer that question, we would really need to see what the classifications and characteristics to determine non-bank SIFIs are and then see if there are some things a company could do to restructure to get out of that. I don’t think we really know the answer to that question yet, but that will be a very interesting thing to look at.
What do you think will be the FIO’s next move once this long process is completed?
Anything said until that report comes out is going to be speculative, but it’s safe to say that they’ll be looking at things like captive insurers and some of the big issues we see the NAIC looking into right now. One of the big things that the industry is looking at with some apprehension is the ability of the FIO to issue data calls. That’s one of the statutory powers that the Dodd-Frank Act gives to the FIO that could be a challenge for the industry, depending on the timetable set forth for data calls and what types of data they’re looking for. Everything, from having the technical infrastructure in place to provide the data to privacy concerns, is on the table.
What’s the latest word on the FIO report?
Apparently there was a comment that Director McRaith made indicating that we can expect it around June or July, so it could wind up being—again, it could also come out tomorrow—but it’s looking like it could end up being a year and half late.
Justin Stephani is associate editor for Insurance Networking News.
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