Fed Rules Making Has Insures on Edge

By Victoria McGrane And Ryan Tracy 

        WASHINGTON--The Federal Reserve, known for regulating the country's largest banks, has become a major overseer of insurance firms in a big shift for an industry long regulated by states.
        After years of delay in writing capital and other rules for the roughly one-third of the insurance industry it now oversees, the Fed is beginning to establish the new regulatory regime. The regulator is hiring new staff, training existing bank examiners to supervise insurance firms and seeking input from industry officials and state regulators about how to craft the rules and better understand insurance companies.
        The Fed's foray into overseeing insurers--a power it gained in the 2010 Dodd-Frank financial law--is prompting concern among insurance companies and state regulators, who worry the central bank will enact onerous capital rules and treat insurance firms like banks. Fueling those fears are experiences like that of MetLife Inc., which failed the Fed's "stress tests" in 2012 despite the firm's protests the Fed misunderstood its business model and lost a battle last year to convince the Fed and other U.S. officials that its failure wouldn't pose a risk to the financial system.
        Industry officials have brought their worries to lawmakers on Capitol Hill, and the concerns are likely to come up during a hearing Tuesday convened by Senate Banking Committee Chairman Richard Shelby (R., Ala.) and a similar House hearing on Wednesday. Sens. Jon Tester (D., Mont.) and Dean Heller (R., Nev.) introduced a bill Monday related to insurance capital rules.
        The Fed gained much of its sway over the insurance industry through the designation of three major insurers as "systemically important financial institutions"--American International Group Inc., Prudential Financial Inc., and MetLife, which is suing to overturn the label. But the Fed also oversees 14 insurance companies that own banks, which it inherited in 2011 with the dissolution of the Office of Thrift Supervision. The Fed has been supervising these firms ever since.
        Altogether, the Fed supervises insurers amounting to about one-third of U.S. insurance industry assets, Mark Van Der Weide, deputy director of the Fed's banking division, said in testimony prepared for Tuesday's Senate hearing.
        Fed officials say the regulator doesn't plan to treat insurers like banks and has acquired insurance expertise to help it better understand the business model.
        "We are exercising great care as we approach this challenging mandate," Mr. Van Der Weide said in his testimony. He stressed that the central bank is "investing significant time and effort" to improve its understanding of the industry and is committed to tailoring the rules and working with firms and state regulators.
        Between Washington and the Fed's regional branches, the central bank has about 70 people working on insurance supervision, including four actuaries based in Boston.
        Still, the Fed's renewed activity on insurance rule writing has the industry on edge. Under state regulation, U.S. insurers have operated through a network of state-based subsidiaries. Now, the Fed oversees each firm's holding company, meaning it can impose an additional layer of requirements for risk management, capital, reporting or other matters.
        Industry representatives worry the Fed's previous focus on the banking sector will lead it to adopt rules that aren't suited to insurance, potentially making them maintain more capital than they think is necessary at their parent company, hire new staff or invest in expensive compliance systems. In 2012, the Fed proposed to apply bank-focused capital rules to insurance holding companies but backed off under pressure from the industry and Congress.
        For both the Fed and the industry, "the first year was a lot of education and that education continues to this day," said one insurance-industry executive who has been overseen by the Fed for the past several years. Fed officials "are much more oriented to a much higher level of documentation and putting things in writing" than state regulators, he said.
        Industry officials presented their own capital-rule proposal to Fed governor Daniel Tarullo at a meeting in February, and senior Fed staff discussed insurance supervision with state regulators in recent weeks. The industry has also been floating ideas on Capitol Hill that could guard against the Fed adopting bank-like rules, according to people familiar with the conversations. Those include creating a new Fed insurance advisory committee, a Fed board seat reserved for someone with insurance expertise and a separate Fed division of insurance. The latter idea has been raised with Fed officials as well.
        "It's premature to judge the Fed yet," former Sen. Ben Nelson, chief executive of the National Association of Insurance Commissioners, which represents state regulators, said in an interview. State regulators--several of whom argued that the state-based system was plenty robust to oversee MetLife--are concerned the Fed might adopt capital rules that aren't consistent with the ones states have imposed.
        Fed officials need to "lift the hood and let people look into the process" and what they're considering as they develop the rules, Mr. Nelson said. "It's being in the dark that causes more angst."
        The central bank has been on a learning curve to deal with its new responsibilities--adding to the industry's concern. Before she took the job more than two years ago, for instance, the Fed's lead examiner at AIG, one of the world's largest insurance firms, hadn't previously overseen an insurance firm. The roughly 15-person AIG examination team also includes insurance experts.
        In 2011, the Fed held a large internal conference about insurance supervision and has since been sending staff to in-person and online training courses on the topic. Last June, the Fed hired its first head of insurance supervision, tapping Thomas Sullivan, a 30-year industry veteran who served as Connecticut insurance commissioner during the financial crisis.
        Mr. Sullivan, who reports to a director inside the Fed's Division of Banking Supervision and Regulation, currently has three people working under him, with plans to soon hire five more.
        Fed officials had put their insurance rule-writing work on hold for several years as they waited for Congress to pass legislation clarifying whether the Fed could tailor capital rules to insurers' specific business model. Congress passed the legislation late last year, and the Fed has since started to ramp up work on the rules.
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        (END) Dow Jones Newswires

        April 27, 2015 19:54 ET (23:54 GMT)

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