A bipartisan group of U.S. senators is introducing legislation that would give the Federal Reserve more flexibility in regulating systemically important insurance companies such as American International Group Inc. (AIG)
The Senate bill, whose sponsors include Ohio Democrat Sherrod Brown and Nebraska Republican Mike Johanns, is meant to establish “capital standards that are properly tailored to the unique characteristics” of the insurance industry, according to a draft of the bill obtained by Bloomberg News.
The bill comes as insurance companies facing systemic risk designation by a panel of regulators known as the Financial Stability Oversight Council work to convince the Fed that they shouldn’t face the same capital standards as banks.
“We’re looking at what kind of regulations they are handing down and how insurance companies can be governed differently,” Brown said in an interview today.
AIG, based in New York, was deemed a systemically important non-bank financial company by the FSOC on July 9. The council, led by Treasury Secretary Jacob J. Lew, is also considering whether to designate Prudential Financial Inc. (PRU) and MetLife Inc. (MET) systemically important, which would subject them to Fed supervision.
Fed Governor Daniel Tarullo told the Senate Banking Committee on July 11 that the Dodd-Frank Act puts the central bank “under a constraint” by requiring that “generally applicable capital requirements be applied to all of the holding companies that we supervise.”
The Senate bill would remove insurers from a Dodd-Frank provision that requires bank regulators to establish minimum risk-based capital and leverage standards. It would allow the bank affiliates, including insurance companies, to continue to be subject to capital requirements from their prudential regulators. Insurance companies would be subject to state-based capital standards and any insurer designated a systemic risk would still be subject to the Fed’s standards.
“Senator Brown believes that the Fed already has the flexibility to make these changes, which recognize that insurance companies have different business models from banks, under the current law,” Meghan Dubyak, a Brown spokesman, said in an e-mail. “He encourages the Fed to do so.”
The Financial Services Roundtable, which represents insurers, said in a statement it supports the bill.
“This legislation is important to provide certainty for insurers who may otherwise be caught up in being subject to the same capital standards as banks,” Roundtable President Tim Pawlenty said in the statement.
MetLife, the largest U.S. life insurer, has proposed to the Fed an alternative that it said is more appropriate for insurers deemed systemically important. No. 2 Prudential has also met with the Fed to discuss capital.
“No amount of ‘tailoring’ will ever make bank capital standards fit a life insurer’s balance sheet,” MetLife Chief Executive Officer Steven Kandarian said in a speech in Washington in April. “There is a better way.”
Tighter capital rules could lead to higher prices for consumers and put the company at a disadvantage against smaller rivals, Kandarian said in the speech on April 10. Fed oversight could also limit companies’ flexibility in buying back shares, New York-based MetLife has said.