Although the Financial Stability Oversight Council created by the Dodd–Frank Wall Street Reform Act could serve an incredibly useful purpose, FSOC’s activities so far have been misguided, an insurance regulator said last week.
Ted Nickel, president of the National Association Insurance Commissioners, took FSOC members to task for all the effort they have put into designating financial firms, including insurers, as systemically important financial institutions, or SIFIs. He spoke during a panel discussion at the Property/Casualty Insurance Joint Industry Forum on Jan. 17 in New York City.
Nickel, who is also Wisconsin’s commissioner of insurance, was one of the experts who discussed changes in insurance regulation on the horizon at the forum three days prior to the inauguration of Donald Trump as president. Nickel, together with Ian Adams, senior fellow with the R Street Institute, and Wall Street Journal Editor Leslie Scism also made predictions about the fate of the Federal Insurance Office and discussed a recently negotiated international agreement on reinsurance and insurance regulation between the European Union and the U.S.
Push for FSOC Refocus
“We’re going to be advocating for a repeal of the FSOC designation process,” Nickel said when asked by the panel moderator, Chuck Chamness, president and CEO of the National Association of Mutual Insurance Companies, to handicap President Trump’s top priorities in rolling back federal regulations introduced during the last eight years.
Nickel, reporting on the wish list of NAIC members instead, also said that the NAIC would like to see the insurance commissioner member of FSOC “have a vote on that board, particularly when they’re voting on matters of financial significance to insurers.” The state insurance commissioner representative of FSOC is currently a non-voting FSOC participant.
(Peter L. Hartt, director of New Jersey’s Insurance Division, became the state insurance commissioner representative last August, replacing former North Dakota Insurance Commissioner Adam Hamm, whose term expired.)
“I think monitoring solvency of insurance companies is best done at the state level,” Nickel said. “I don’t think the federal labeling of insurance companies [as systematically important] through the FSOC process has been particularly helpful given the fact that there’s no off ramp.”
But Nickel asserted that the FSOC body can serve a very important purpose. “Its best purpose would really be to gather on a regular basis and talk about and identify areas of systemic importance to the financial system of the U.S,” he offered.
“Having those conversations on a regular basis can be ridiculously helpful,” he said. “I think that’s one of the two jobs that they have that—my understanding is—they don’t spend a lot of time doing. My understanding is they spend a lot of time on the designation process. And if they would spend more of their time on gathering information on trends in the economy or trends globally that could wash up on our shores and result in financial peril, I think it would be beneficial to everybody.
“If they refocus their efforts, that would provide a lot of value.”
Scism said editors in WSJ’s Washington bureau believe that President Trump and Congressional Republicans will be able to roll back parts of Dodd-Frank, suggesting three potential routes to gutting the parts related to SIFI designations. “One way is to do this legislatively. Another might be through the FSOC process as Trump’s appointees…populate the FSOC,” possibly voting not to re-designate Prudential Financial or American International Group when those matters come up before the FSOC again over the coming years.
Offering a final possibility, she said, there’s some speculation that the Trump administration would withdraw or pull out an existing lawsuit that FSOC filed to overturn a ruling by U.S. District Judge Rosemary Collyer, who rescinded MetLife’s SIFI designation in March.
“From what my colleagues in Washington have picked up, there’s a lot less enthusiasm—maybe there’s no enthusiasm to have insurers designated as systemically important,” Scism said. “The case hasn’t been made that Dodd-Frank will prevent a collapse. There just aren’t the signs that these insurers are putting the financial system at risk. That hasn’t been presented in materials made public.”
She called the “AIG thing” a “one- off,” noting that while it was a huge failure, the troubled part of the insurer was a financial products office that was overseen by the Office of Thrift Supervision. “I think a lot of what the states have done since the collapse is to recognize that they have to take into consideration other parts of a big financial conglomerate that aren’t regulated by the states and have a handle on those other parts,” she said.
Nickel added: “If an insurance regulator start[s] doing an analysis of a very large company, we don’t have to have a special designation. We just, we get in there and we take care it. We take care of the financial issues as they arise at varying levels of increasing oversight.”
Last November, when AIG CEO Peter Hancock was asked whether the prospect that the election results could be a “gamechanger for non-bank SIFI regulation” and for the giant insurer, he had this to say:
“To date, designation as a SIFI has not hindered us in pursuing our true north of maximizing intrinsic value, returning capital and optimizing our business in a way that makes sense. There’s a modest cost for complying with SIFI regulation over and above what we are already investing in controls,” he said, adding that his company had probably “done more than any of the bank or nonbank SIFIs to de-risk.”
Hancock added: “If there’s a change in the composition of FSOC, that may change the way the relative importance of SIFI designation is in the eyes of those policymakers.”
Still, the change would be of little consequence, he suggested. “For us, it just simply isn’t a binding constraint on our capital returns and our objectives ….We’re focused very much on managing our capital prudently, being compliant with whatever regime” exists. And even if FSOC’s SIFI designation authority were to change, AIG would “still have FSB [Financial Stability Board] and G-SIFI to worry about,” he said, referring to the international designation—”and 200 other regulators.”
Scism noted that AIG has divested of businesses in the wake of the SIFI designation. “It was about $1 trillion in assets before the financial crisis ….It’s now about $500 million in assets. So, it’s now in third place behind MetLife and Pru,” she said.
Recalling that the forum took place almost a year to the day that MetLife announced that it was going to divest about one-fifth of itself to spin off most of its retail life insurance operations, she said the remaining company will be a very different company than the one that was designated a SIFI—mainly a group life insurer mostly with 40 percent of its business now outside the U.S.
The report of the changing structures of the insurers prompted a question from Chamness about the SIFI designation process: “Is this a sign that it’s working?”
Nickel isn’t buying it. “I don’t have any problem with a gazillion-dollar company,” the state insurance regulator said. “If they’re handling themselves, if they’re working [through] problems. If they’re collecting premiums, paying claims, doing their investments. I don’t care how big [the insurers] are.
“It shouldn’t be the size of the company that just automatically puts them in the crosshairs of a third party, in this case, FSOC, and in many cases on the European front [with] some of the designations that FSB makes.
“The role of the regulator shouldn’t be to strong arm and … threaten companies to get smaller or else. That’s just not a good way to regulate,” Nickel said.
“I regulate, and my folks regulate on the basis of risk. Too big is not a risk to me. A risk is doing dumb things and not having yourself positioned accordingly, not thinking about future areas that might be of concern and addressing those upfront” is worrisome, he said.
Also troubling is the very idea that SIFIs are selling pieces of themselves “in the hope that someday somebody looks at them and says you’re not here anymore …Never mind.”
“That’s not an off ramp. That’s just guessing until somebody doesn’t think you’re as important as they thought you were,” Nickel said.
“I struggle with the premise of too-big-to-fail. I think there’s an element of too-risky-too-fail, or too-big and too-risky to fail. But just too big isn’t not something I subscribe too,” he concluded.
What Happens to FIO?
The Federal Insurance Office within Treasury was another outgrowth of Dodd-Frank. Chamness said NAMIC brought “some level of skepticism” to the creation of the FIO initially and said that the office remains troublesome in terms of its data collection authority and the covered agreement authority that it has just exercised.
But there’s at least one area where FIO “serves a lot of good, it seems like by unanimous agreement,” according to Scism. “After the financial crisis of 2008, it became really evident that there was really poor understanding of how the insurance industry operates. It seemed like a lot of people in Washington really didn’t understand the difference between banks and insurers and how they financed their operations,” she said. “FIO does bring some insurance expertise to Washington,” she said, suggesting a reason for the office to continue.
Adams of the R Street Institute, a free market think tank, had a simpler reason: “I would be surprised if there was a serious reevaluation of the office’s existence for the simple reason that it’s an appointment. It’s a place for someone else to land in a town that trades on favors,” he said.
Covered Agreements: Too Early
Turning to the negotiations that saw FIO and the Office of the U.S. Trade Representative hammer out an agreement with EU negotiators, the panelists said it was too early to evaluate the specifics of the covered agreement, long envisioned as a means of allowing non-EU countries to be determined to be “equivalent” to Europe’s Solvency II regime in terms of group supervision and reinsurance.
“Our office staffs and NAIC staff are reviewing what was finally decided. I’m not prepared to make a resounding endorsement of what occurred,” said Nickel, referring to the accord that was announced less than a week before the forum.
Nickel did say that parts of the agreement that give some authority back to the U.S. with regard to group supervision are providing comfort so far. On the other hand, “our concerns thus far have been trying to completely understand the reinsurance piece,” he said, referring to provisions calling for an end to local presence and collateral requirements for U.S. and EU reinsurers. “Having no collateral—or eventual collateral elimination— is just a bit of an anathema to us. We have always build a regulatory framework around making sure there was collateral so we had the ability to enforce judgments. So, as a regulator, when you lose that authority, you get a little bit nervous,” Nickel said, indicating that state regulators “will probably have some more to say about that going forward.”
Turning to the overriding promise of the covered agreement negotiations, Chamness asked, “Did we get equivalence?”
“If you do a word search on the terms equivalence and mutual recognition, neither of them show up,” Nickel said. Noting that a full-fledged review is yet to take place, “there are some areas that we’re comfortable with where the agreement landed,” he added. “It did give us more flexibility, more authority over our companies; it took away some the authority that some of the European’s had over U.S. companies with European entities ….So, I think there are some areas where it made some process,” he concluded.
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