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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