Moody’s Reports on Proposed Systemic Risk Rules for Insurers

November 8, 2011

A key ratings agency says that recently proposed guidelines for identifying which insurers would qualify as systemic risks represent an important first step in improved federal regulation of financial institutions.

The proposed guidelines from the Financial Stability Oversight Council (FSOC), established under the Dodd-Frank Act, “provide important information on how systemically important financial institutions (SIFIs) would be identified and which insurers could be candidates for the designation,” according to Moody’s Investors Service.

According to Moody’s, three giant insurers — MetLife, AIG and Prudential– would qualify as systemically imporant under the proposed guidelines, with a fourth– Berkshire Hathaway– a questionable candidate.

Insurers meeting the SIFI criteria would be subject to heightened regulatory scrutiny.

Insurers have generally argued that they did not cause the financial crisis and do not pose a systemic risk.

“Although details of enhanced SIFI supervision have yet to be established and their full credit implications are still unknown, we believe that the new proposed SIFI criteria are an important first step,” says Laura Bazer, a Moody’s vice president and senior credit officer.

“In general, we believe that greater regulatory oversight and more conservative financial and risk management requirements of these large, highly interconnected global financial institutions would be credit positive, limiting their ability to assume outsized risk, and thereby supporting their overall financial health,” says Moody’s Bazer.

Insurers that receive the designation would likely be subject to additional supervision by the board of governors of the Federal Reserve.

According to Moody’s, the guidelines as proposed would create a three-stage process for determining SIFIs.

Stage 1 would apply six threshold metrics to all non-bank financial institutions, with a first criterion being total consolidated global assets of $50 billion for U.S. groups and $50 billion of total consolidated U.S. assets for foreign groups.

Companies that met both the asset threshold and any of the five additional thresholds would then have their potential risk to the overall financial system and their own vulnerability to financial stress tested under Stage 2.

Based on analysis of 2010 year-end U.S. GAAP and statutory financial data, Moody’s says the likely U.S.-based candidates for Stage 2 analysis are MetLife, AIG and Prudential. Although Berkshire Hathaway also crosses certain metric thresholds, it may not be deemed a “nonbank financial company” under the Dodd-Frank guidelines , and therefore, it may not be a candidate for SIFI evaluation, according to Moody’s.

In Stage 3, companies would be subject to further qualitative and quantitative evaluation, based on company-specific information collected by the Office of Financial Research (OFR) or appropriate regulatory agency.

Proposed on Oct. 10, 2011, the guidelines (12 CFR Part 1310, RIN 4030-AA00, “Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies”) are currently in a 60-day public commentary period.

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