It should come as no surprise to those in the industry that insurance companies are increasingly targeted with bank-like regulation and oversight.

Regulators both in the United States and overseas are imposing more capital and liquidity standards on large insurers and the Financial Stability Oversight Council, created by the Dodd-Frank Act, designated AIG, Prudential, and MetLife as non-bank Systemically Important Financial Institutions (SIFI). These firms are subject to examination, supervision, and regulation by the Federal Reserve. Thus far, MetLife is the only non-bank SIFI to successfully litigate the removal of the designation.

Now, AIG and Prudential—and eventually other firms—may face additional demands for risk-buffering capital reserves.

The latest wave of bank-like regulation comes by way of a June 3 vote by the Federal Reserve’s Board of Governors that approved an advance notice of proposed rulemaking that invites public comment on conceptual frameworks for capital standards for systemically important insurance companies and those that own a bank or thrift. The standards would differ for each group.

The Fed also approved a proposed rule to apply enhanced prudential standards to systemically important insurance companies designated by the Financial Stability Oversight Council.

The Fed's ANPR (advanced notice of proposed rulemaking) presents a “consolidated approach” that would apply to systemically important insurance companies, as well as a second “building block approach” for less complex insurance companies that also own a bank or thrift.

The so-called Collins Amendment to the Dodd-Frank Act requires the board to establish minimum leverage capital requirements and minimum risk-based capital requirements that are at least as stringent as the generally applicable leverage and risk-based capital requirements that apply to insured depository institutions. It was amended in 2014 to provide greater flexibility when tailoring these capital requirements to the risks presented by insurance companies.

“The frameworks we are considering would address all the risks across an insurance company's regulated and unregulated subsidiaries,” Federal Reserve Chair Janet Yellen said prior to the vote. “This proposal is an important step toward capital standards that are both appropriate for our supervised insurance firms and that enhance the resiliency and stability of our financial system."

For systemically important insurance companies, the consolidated approach would categorize an entire insurance company's assets and insurance liabilities into risk segments, apply appropriate risk factors to each segment, and then set a minimum ratio of required capital. As non-bank SIFIs, AIG and Prudential would be the first to face the new requirements.

For insurance companies that own a bank or thrift, the building block approach would aggregate existing capital requirements across a firm's different legal entities to arrive at a combined, group-level capital requirement.

“This proposal is an important step toward capital standards that are both appropriate for our supervised insurance firms and that enhance the resiliency and stability of our financial system."
Janet Yellen, Chair, Federal Reserve Chair Janet Yellen

The Fed also proposed a capital plan for the 12 insurers it oversees because they own banks, including State Farm, TIAA, and Nationwide. Collectively, these firms have approximately $2 trillion in assets and represent approximately one-quarter of the assets of the U.S. insurance industry.

The proposal to the capital requirements already imposed by other regulators, in particular those at the state level. One reason that flexibility was warranted, the Fed says, is because some firms prepare financial statements according to U.S. Generally Accepted Accounting Principles, while others adhere to U.S. Statutory Accounting Principles in filings with relevant state insurance regulators.

The Fed views having a consolidated holding company capital standard as a deterrent for firms placing assets in whichever legal entity has the lowest legal-entity-level capital requirements and from engaging in double leverage—use by a holding company of debt that is downstreamed as capital to subsidiaries.

“Both the building block approach and the consolidated approach recognize the distinct differences between insurance companies and banks, and would use insurance-focused risk weights and formulas that reflect the appropriate nature of insurance liabilities,” a statement accompanying the proposal says.

“Among institutions that the board supervises, those that engage in insurance activities are different from banks in terms of the business model and risk profile,” added Deputy Director Mark Van Der Weide. “The most appropriate approach best reflects the risks of the business of insurance and is proportional to the threat that the firm poses to financial stability.”

A separate proposed rule applies enhanced prudential standards to systemically important insurance companies, as designated by the FSOC. As required under the Dodd-Frank Act, these standards would apply “consistent liquidity, corporate governance, and risk-management standards” to the firms. They, and others receiving a SIFI designation in the future, would also be required to employ both a chief risk officer and chief actuary to ensure that firm-wide risks are properly managed.

“To help ensure strong corporate governance and risk management, the proposal would require all systemically important insurance companies to identify, measure, monitor, and manage risk at an enterprise-wide level,” said Noah Cuttler of the Fed’s Division of Banking Supervision and Regulation. The chief risk officer would be required to ensure that all risks within the company, regardless of where they were originated or are currently housed. This includes identifying, measuring, and monitoring intra-group risks.


The following are among the questions presented in the Board of Governors of the Federal Reserve’s Advance Notice of Proposed Rulemaking.

Are these identified considerations appropriate? Are there other considerations the Board should incorporate in its evaluation of capital frameworks for supervised institutions significantly engaged in insurance activities?

Should the same capital framework apply to all supervised insurance institutions?

What criteria should the Board use to determine whether a supervised insurance institution should be subject to regulatory capital rules tailored to the business of insurance?

If multiple capital frameworks are used, what criteria should be used to determine whether a supervised insurance institution should be subject to each framework?

In addition to insurance underwriting activities, what other activities, if any, should be used to determine whether a supervised institution is significantly engaged in insurance activities and should be subject to regulatory capital requirements tailored to the business mix and risk profile of insurance?

Should the Board categorize qualifying capital into multiple tiers, such as the approach used in the Board’s Regulation Q? If so, what factors should the Board consider in determining tiers of qualifying capital for supervised institutions significantly engaged in insurance activities under the BBA?

What should the Board consider in determining more stringent capital requirements to address systemic risk? Should these requirements be reflected through qualifying capital, required capital, or both?

What should the Board consider in developing a definition of qualifying capital?

What risk segmentation should be used? What criteria should the Board consider in determining the risk segments? What criteria should the Board consider in determining how granular or risk sensitive the segmentation should be?

What criteria should the Board consider in developing the minimum capital ratio and a definition of a “well-capitalized” or “adequately capitalized” insurance institution?
Source: Federal Reserve

The corporate governance and risk management standard would require a systemically important insurance company to have a chief actuary. “These companies have complex balance sheets that depend heavily on estimates of future revenues, the amount and timing of payments, and reserves that the companies need to meet those payments,” Cuttler added. A chief actuary would provide enterprise-wide oversight across the company's legal entities, lines of business, and geographic markets.

As is often the case with expanded regulatory regimes, the Financial Crisis was a catalyst.

“Among other things, it revealed that too narrow a focus on the safety and soundness of the individual legal entities in a corporate group could result in a failure to detect threats to the group, and to financial stability that emerge from unregulated or less regulated subsidiaries of the group,” said Linda Duzik, the Fed’s international negotiator for the insurance sector and its representative to the International Association of Insurance Supervisors. “The near collapse of AIG during the financial crisis was precipitated in significant part by activities not within the purview of regulators. Severe losses in a non-insurance subsidiary of AIG undermined confidence in the entire organization and contributed to the firm's inability to obtain adequate funding.”

The crisis, Duzik added, “reaffirmed the importance of consolidated supervision that encompasses the parent company and all of its subsidiaries.” That view, “allows the board to understand a supervised institution's activities, resources, and risks from the perspective of the entire enterprise.”

The industry view thus far is both appreciative and cautious. “The Federal Reserve Board's insurance-centric approach to its oversight of the life insurance industry is appropriate,” American Council of Life Insurers President and CEO Dirk Kempthorne said in a statement. The ANPR “recognizes that the business and associated risks of insurers are very different from those of banks and other financial firms, and that rules governing insurance companies’ capital must be specially tailored for the industry.”

There are, however, “questions about an approach that would put in place two distinctly different capital regimes for insurance entities overseen by the board.”

Comments on both the ANPR and proposed rule are due by Aug. 2, 2016.