The Dodd-Frank Act was a cornucopia of opportunity for rule writers. To the regulatory community, this was almost a bottomless candy jar. And so our regulatory apparatchiki began to beaver away and produced, to date, something like 22,000 pages of rules which purport to moderate or prevent bad behavior by all those nasty institutions perceived to have some responsibility for the financial crisis of 2008. Curiously, at least, to me, Dodd-Frank included in among its bad boys, those institutions “significantly engaged in insurance activities.” Apparently, our Congressional grandees in the overheated environment of the Great Recession conflated insurance and banking. Hey, they are kind of like financial institutions, and they’re big, or at least some of them are, and are probably filing with nefarious types inclined to go off the reservation and therefore in need of “guidance” from the regulatory community.
Now, after six years of fixing to do something about it, the Board of Governors of the Federal Reserve System recently approved two initiatives to punish…er, further prudentially regulate these dodgy insurers. The first is an advanced notice of proposed rulemaking (“ANPR”) describing a conceptual regulatory capital framework to apply to insurers supervised by the Fed. The second, a notice of proposed rulemaking (“NPR”) that would apply certain “enhanced prudential standards” to nonbank financial companies designated as systemically important by the Federal Stability Oversight Council that have significant insurance activities and that the FSOC has determined should be supervised by the Fed. The ANPR is available here, and the NPR is available here. The opening statement of Fed Chair Janet L. Yellen, found here, and of Fed Governor Daniel K. Tarullo, found here, provide additional context.
Folks, there’s not a lot of companies in this regulatory remit. Under the ANPR, we’re talking a small handful of bank holding companies which have subsidiaries significantly engaged in insurance activities and insurance companies that are SIFIs. Currently, the Fed supervises twelve holding companies with significant insurance activity and two SIFIs.
Regarding the NPR, the proposed “enhanced prudential standards” will require insurers, which are SIFIs, to implement corporate governance, risk management, and liquidity risk management standards, including conducting liquidity stress testing and maintaining a liquidity buffer. Currently, AIG and Prudential are the only two Insurer SIFIs. Recently, MetLife won a federal district court case challenging FSOC’s designation of MetLife as an Insurer SIFI, which the FSOC is appealing (see Dechert’s OnPoint here).
The ANPR and NPR are not yet really rules, yet these musings of the Fed, while preliminary, certainly illuminate the Fed’s thinking that we ought to treat these insurers largely as we treat banks with their attendant capital, liquidity, risk management and stress testing obligations. Does this really make sense? Are these institutions really a systemic threat to the financial marketplace? Is anyone quivering at the thought of some large-ish insurance company going casters up? But the Fed says, “hey, it’s in Dodd-Frank; moreover, the Europeans are doing it,” so we ought to as well. Is that a good enough answer? Should we have a real debate based on facts and real analysis on whether these institutions deserve this sort of additional layer of prudential regulations? Is it worth the price that is always attendant on another set of regulations? Moreover I am worried that even if this starts as an effort to regulate a small handful of large institutions, it will creep down market and we will end up with a complete federal overlay on top of our existing and heretofore seemingly adequate state regulatory regime for insurance companies.
Look, we’ve seen this movie before and it hasn’t ended well. Once requests for comments go out, sometimes it seems like the cake is fully baked and the regulatory regime proposed by the regulator is a foregone conclusion. Unfortunately, the comment period on these rules was very short. While the deadline on the ANPR has been extended to mid-September 2016, the deadline for comments on the NPR remains mid-August 2016. The Fed is looking for comments and has set forth 37 discussion-like questions in the ANPR and 28 such questions in the NPR. Responses are not limited to those questions, however, and the Fed invites any further suggestions and commentary. The NPR and ANPR are conceptual and there is a long way before regulation. And, in any event, they apply to a very small subset of insurers and I am sure that at least the SIFIs have been deep in conversation with the regulators for a very long time already. Our principal trade organizations representing a broad range of the financial services and the insurance industry will undoubtedly comment. This is not like Risk Retention or the Liquidity Coverage Rule or some of the other recent rules we have lambasted in this commentary that will have an immediate and substantial negative impact on capital formation, but it is another marker along the path of increasing regulatory overreach that is the legacy of Dodd-Frank. The financial industry has to continue to man the barricades, put on the long pants and continue to fight the fight against regulatory overreach, nonsensical rules, and rules written without any appreciation of either cost or unintended consequences. If we don’t, it’s fair to say that we’ll get the regulatory regime we deserve.