Time To Act On Capital Standards for Life Insurers

ACLI

Consensus in Washington is harder to find than a Yankees fan at a Red Sox convention.

But we did it.

We found the one issue that everyone in Washington agrees on: insurance companies must not be treated like banks. This is especially true when setting appropriate capital standards.

There it is. The rarest of the rare. A topic on which the Obama administration, Democrats and Republicans in the House and the Senate, state and federal regulators and private industry all see eye to eye.

In this hyper-partisan era when seemingly every subject this side of "Will the sun come up tomorrow?" can spark an overheated debate, this emerging consensus on capital standards for insurers is quite remarkable.

Especially considering how far we've come in the past few years.

In the aftermath of the 2008 financial crisis, Congress and the administration were determined to prevent another calamity. The Dodd-Frank Act was passed, giving the Federal Reserve the authority to regulate non-bank organizations that are affiliated with thrifts or are designated as "systematically important financial institutions." Several insurance companies fall under these new rules.

One provision in Dodd-Frank would impose bank capital requirements for all these institutions. The author of this amendment, Sen. Susan Collins of Maine, wrote federal regulators to clarify that "it was not Congress's intent that federal regulators supplant prudential state-based insurance regulation with a bank-centric capital regime.” But the Federal Reserve has interpreted the language to mandate it must treat insurance companies like banks.

Regulation is one thing. But regulating insurance companies like banks makes no sense.

Life insurance companies and banks have completely different business models, financial structures, funding mechanisms and risk profiles. Life insurers provide valuable coverage for their customers' long-term risks, and they match their long-term liabilities with appropriate assets of similar durations. The insurance companies' capital requirements directly reflect this level of matching.

Banks' assets and liabilities are not matched the same way. Banks are more dependent on short-term, on-demand sources of funding and in periods of stress, they could face a "run". Consequently, because of this risk the capital requirements for banks are set up far differently.

Life insurers let everyone know that if a one-size-fits-all capital standards viewpoint were adopted, it could damage the financial condition of well-run life insurers and make it harder for them to provide financial protection to their customers, more than 75 million American families. The whole purpose of the Dodd-Frank Act was to stabilize the U.S. financial system. Disrupting the operations of life insurance companies would in no way accomplish or contribute to that goal.

Fortunately, this message has been heard throughout Washington.

At her confirmation hearing Federal Reserve Chairwoman Janet Yellen said she believes that the insurance industry and other non-bank institutions deserve better than being subject to a "one-size-fits-all”"regulatory scheme created for banks.

In February, Federal Reserve Governor Daniel Tarullo told a Senate panel that, "We are trying to tailor, as best we can, the capital requirement to take account of A) the particular product that insurance companies offer that banks do not, and B) the different business model."

Mary Miller, undersecretary for domestic finance at the Treasury Department, recently told the Senate Banking Committee that "a lot of attention has been paid to the business models, a lot of attention has been paid to the fact that you can't have that one size fits all approach to capital."

So on Capitol Hill, bipartisan legislation has been introduced to allow the Federal Reserve to develop and implement appropriate, insurance-centric capital standards for those life insurers under its jurisdiction. And Sen. Collins is working to ensure the original purpose of her amendment by clarifying that insurance companies should not be treated like banks.

So all the stars in Washington are aligned. But still nothing has happened. What is taking so long? Why aren"t we seeing any results?

A common-sense solution is near. The time is now. Let's get it done.

Dirk A. Kempthorne is President and CEO of the Washington, D.C.-based American Council of Life Insurers (ACLI). He served as the 49th U.S. Secretary of the Interior; as Idaho's governor, U.S. Senator and Mayor of Boise.

Sponsored image: 
ACLI