The Federal Reserve Board (FRB) regulates all financial institutions designated as systemically important financial institutions (nonbank SIFIs) by the Financial Stability Oversight Council (FSOC), an entity created under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Currently, FSOC has designated two insurance companies as nonbank SIFIs: Prudential and AIG. The FSOC also designated MetLife as a nonbank SIFI, but a U.S. district court judge recently overturned that designation. [see 3.31.16 alert].
The FRB has relatively little experience regulating insurance companies. Since the adoption of the Dodd-Frank Act, the insurance industry has tried to gain insight as to how the FRB will choose to regulate insurance companies given that they are very different entities than banks and operate on very different business models. A recent Advance Notice of Proposed Rulemaking (ANPR) has enabled the industry to glean some understanding as to how FRB might approach its regulation. At its June 3 open board meeting, the FRB approved an ANPR seeking public comment on two different frameworks for applying capital standards to insurance companies. Under the first framework, also called the “consolidated approach,” the FRB “would categorize an entire insurance firm’s assets and insurance liabilities into risk segments, apply appropriate risk factors to each segment at the consolidated level, and then set a minimum ratio of required capital.” This approach would apply to any insurance company designated as a nonbank SIFI.
Under the second framework, referred to as the “building block approach,” the FRB “would aggregate existing capital requirements across a firm’s different legal entities to arrive at a combined, group-level capital requirement, subject to adjustments to reflect the Board’s supervisory objectives.” This approach would apply to any insurance company that owns a bank or thrift.
Simultaneously with the ANPR, during the June 3 meeting, the FRB also approved a proposed rule that would apply “enhanced prudential standards” to insurance companies designated nonbank SIFIs. This rule implements standards, required under Dodd-Frank, that the FRB “apply consistent liquidity, corporate governance, and risk-management standards” to the companies. This proposed rule would also require each insurance nonbank SIFI to employ a chief actuary and a chief risk officer as additional safeguards to prevent a possible financial collapse.
Comments on both the proposed rule and the ANPR are due to the Federal Reserve Board on or before August 2, 2016. The Final proposal of the ANPR and adoption of the proposed rule will bring further definition to the concept of a non-bank SIFI and its regulatory burdens.