S&P Comments on Dodd-Frank Act’s Implications for Insurers

July 23, 2010

A comment from Standard & Poor’s Ratings Services notes that the Dodd-Frank Wall Street Reform and Consumer Protection Act “seeks to expand regulation to address many aspects of the financial services sector. Although much of the discussion about this bill so far has focused on banks, the legislation will also affect other types of financial institutions, including insurance companies.”

S&P indicated that it doesn’t expect the legislation to have an immediate credit impact on its ratings on U.S. insurance and reinsurance companies. In fact S&P said it believes that “several aspects of the reform bill could help U.S. insurance/reinsurance companies maintain their competitive positions in the global marketplace.”

As an example it cited the establishment of the Federal Insurance Office within the Department of Treasury, which would “create a central point for insurance industry information. This office will monitor all aspects of the insurance industry and will have an advisory voice on the Financial Stability Oversight Council.

“Among a wide spectrum of responsibilities, this office will represent the U.S., as appropriate, in the International Association of Insurance Supervisors and assist in negotiating covered agreements.This could constructively address a concern that some regulatory parties within the international community raised as they evaluate the level of supervisory equivalency to be placed on the U.S. system of national insurance regulation.”

Although S&P didn’t expand on this point, the imminent adoption of the Solvency II regulations governing the insurance industry in the European Union are the main concern.

S&P pointed out that in its view “U.S. reinsurers would be particularly vulnerable to increased operational costs and lower profit margins if the U.S. regulatory system were to fail to gain full equivalency recognition.” As a result, “as their cost of capital increases, the cost of reinsurance could increase and the amount of reinsurance available to primary insurers could decrease.”

In addition S&P described another portion of the legislation that “could be favorable to insurers:” the establishment of “new national underwriting standards for home mortgages,” which would “require lenders to verify borrowers’ income, credit history, and job status.” S&P said this could mean that “mortgage insurance companies, which have depended on the validity of the borrower’s application information, should encounter better operational results than those experienced in the last three years.”

Many insurance companies have used securitizations and derivatives to manage their risks, and this reform bill only marginally affects these activities.

However, there are some negative aspects. S&P pointed out that “diversified insurance groups with $50 billion in consolidated assets and nonbank financial companies or bank holding companies would become subject to an assessment on large financial firms. Expectations are that these assessments will raise up to $19 billion, which will offset some of the costs and expenses of the bill’s measures.”

S&P stated that in its view “no insurance company (excluding American International Group Inc.) poses a systemic risk to the financial system. As such, the insurance groups subject to this assessment will likely make disbursements that are not specifically related to the risks borne by the insurance/reinsurance industry and will generally decrease absolute capital levels.

“Finally, one of the tasks of the newly formed Federal Insurance Office will be to conduct a study and report to Congress on how to modernize and improve the system of insurance regulation in the U.S.

“It remains to be seen what recommendations are made and how they could affect the current regulatory system. Our ratings on insurance companies consider factors such as the national and global competitive position of insurers, the quality and absolute levels of capital relative to the company’s risk profile, and the sustainability of earnings. Any changes that affect these rating factors could affect ratings.”

Source: Standard & Poor’s

Topics Carriers USA Legislation Reinsurance Market

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