U.S. insurers deemed big enough to threaten the financial system will probably face capital standards that are simpler and less costly than those imposed on Wall Street banks, Federal Reserve Governor Daniel Tarullo said Friday.
The Fed “in coming weeks” will seek outside comment on its plan for creating insurance industry rules mandated by the Dodd-Frank Act, Tarullo said in a Washington speech. His comments revealed the long-awaited outlines of how the Fed will regulate insurers, a controversial process that MetLife Inc. has already sued over to avoid tougher oversight.
Companies such as American International Group Inc. and Prudential Financial Inc. — deemed important enough that their failure could threaten the broader economy — would get regulations that evaluate their capital in a “relatively simple” set of risk categories, according to Tarullo, the Fed governor responsible for managing regulatory matters.
“Compliance costs for these firms should be considerably lower than if they had to conform to the bank holding company capital regime,” he said, noting that the treatment will be “more appropriate for the longer-term nature of most insurance liabilities.”
The Fed also plans to propose capital standards for insurers it oversees because they own banks, Tarullo said. Those firms, typically small parts of their overall companies, will receive a lighter touch, with the central bank largely deferring to measures imposed by the insurers’ existing regulators — often state agencies, he said.
The process for figuring out how to handle insurance firms has already taken years since Dodd-Frank gave the Fed additional authority over them. The industry has made a lengthy lobbying push insisting that it’s unfair to treat insurers like banks. Those defending insurers also have said tough capital standards could make insurance more expensive.
The advance notice of proposed rule-making promised by Tarullo is a significant step in a process that still has a long way to go. Because each stage of writing a rule typically takes months — from seeking comment to proposing text to approving a final version — the new capital system may still be a long time coming.
MetLife would dodge the new capital standards for the biggest insurers after a judge reversed its designation as systemically important by the Financial Stability Oversight Council. The Treasury Department is pursuing an appeal of the court’s finding that the process to label MetLife was flawed.
MetLife Chief Executive Officer Steve Kandarian has said insurers don’t face the same risks as banks because his industry doesn’t have as much of its funds subject to immediate withdrawals. On some life policies, insurers collect periodic premiums and make payments only when a customer dies.
Tarullo also said the Fed decided against following an effort by the International Association of Insurance Supervisors to impose insurance standards, because it “does not really fit our need.”
Insurance industry groups praised the Fed’s rejection of the international standards and its willingness to see that insurers need a tailored approach to oversight. American Council of Life Insurers President and CEO Dirk Kempthorne said his group was glad that Tarullo recognized the “business and associated risks of insurers are very different from those of other financial firms.”
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