On December 18, President Obama signed into law the Insurance Capital Standards Clarification Act of 2014 (the Act). The Act makes it clear that the Board of Governors of the Federal Reserve (the Fed) is not required to apply the bank-based risk and leverage capital requirements of Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to a person engaged in the business of insurance regulated by a state insurance regulator, to the extent that such person “acts in its capacity as a regulated insurance entity.” The Act likewise applies to certain regulated foreign subsidiaries or affiliates of state-regulated insurers, to the extent any such subsidiary or affiliate acts in its capacity as a regulated insurance entity, and the Fed does not determine that the capital requirements in a specific foreign jurisdiction are inadequate.
Dodd-Frank Section 171, commonly known as the Collins Amendment, requires that the appropriate federal banking agencies establish minimum risk and leverage capital requirements on a consolidated basis for (i) insured depository institutions, (ii) depository institution holding companies, and (iii) nonbank financial companies supervised by the Fed. Under the Collins Amendment, these minimum requirements may not be less than “the generally applicable” leverage or risk capital requirements and may not be quantitatively lower than “the generally applicable” risk and leverage capital requirements that were in effect for insured depository institutions as of July 21, 2010, when Dodd-Frank was enacted.
The Act clarifies that, in establishing the minimum risk and leverage capital requirements on a consolidated basis for (i) nonbank financial companies supervised by the Fed and (ii) depository institution holding companies, the appropriate federal banking agencies “shall not be required to include,” for any purpose of Section 171, state-regulated insurers and their qualifying foreign affiliates specified above, to the extent that any such company acts in its capacity as a regulated insurance entity, which includes actions related to “the provision of insurance, or other activities necessary to engage in the business of insurance.”
The Act also provides that a depository institution holding company or a Fed-supervised nonbank financial company, in each case engaged in the business of insurance regulated by a state regulator and that files financials prepared only in accordance with Statutory Accounting Principles (SAP), shall not be required by the Fed under Section 171 or under the Home Owners Loan Act to prepare financials in accordance with Generally Accepted Accounting Principles (GAAP). The risk and leverage capital rules, as implemented by the Fed for U.S. bank holding companies, generally require that a bank holding company prepare GAAP financials on a consolidated basis. Several commenters on the U.S. banking agencies’ proposed Basel III rules, including some savings and loan holding companies, had expressed concern with the burden associated with the requirement to prepare GAAP financial statements, and had argued that SAP was more appropriate for insurance regulatory purposes.