Twenty-four U.S. senators sided with the insurance industry and called on top federal bank regulators to exclude insurers from new capital requirements aimed at banks, arguing that having insurers meet those requirements could inadvertently hurt policyholders, retirees and those who are working to increase their savings.
The bipartisan group of senators said that the new capital requirements do not account for the "distinct nature of the insurance business," nor do they reflect the risk-based capital requirements insurers must meet under the U.S. state-based regulatory regime for insurers. The senators made those comments in an Oct. 17 letter sent to Federal Reserve Chairman Ben Bernanke, U.S. Comptroller Thomas Curry and acting Federal Deposit Insurance Corp. Chairman Martin Gruenberg.
The letter was sent ahead of today's deadline for comments on the proposed rules that would change current capital requirements.
"While robust capital standards are a critical component in any prudential supervisory regime, applying a bank-centric regulatory capital regime to insurance entities creates serious challenges for insurance companies, and potentially policyholders," the letter said.
Under the wide array of financial regulations stemming from the Dodd-Frank financial reform act, the Fed was charged with deciding whether to adopt the Basel Committee on Banking Supervision's new global regulatory standards. The standards, known as Basel III, focus on capital adequacy, market liquidity risk and stress testing. Last year, the Fed announced that it would implement virtually all of the Basel III standards.
The senators, led by Sen. Sherrod Brown, D-Ohio, and Sen. Mike Johanns, R-Neb., said that Congress did not intend for the Dodd-Frank Act and its related financial rules to undermine the state risk-based capital system and replace it with a banking capital regime. In fact, the letter said, the Senate passed legislation that directed bank regulators to consider the existing regulatory requirements that apply to insurers. "Any financial regulations should reflect the will of Congress to respect the distinctions between insurance and banking" the letter said.
The letter went on to say that bank regulators should also consider the timeline for implementing the new rules under Basel III, which includes various deadlines for different capital regulations that range from 2015 to 2018. The senators said regulators should give insurers enough time to transition to any new capital requirements to minimize disruptions to their businesses and their policyholders.
Industry representatives praised the senators' letter, saying that Congress intended to differentiate between the businesses of banking and insurance.
"With the comment period soon coming to an end, it is compelling to see this large bipartisan group of senators weigh-in with financial regulators on what Congress' true intent was when crafting language in Dodd-Frank with respect to new capital requirements as they pertain to traditional insurance activities," said Adam Noah, vice president for federal affairs at the American Insurance Association, in a statement. "To apply a bank-centric capital regime to insurance companies would be unfitting to their traditional business activities; and contrary to Congress' explicit recognition of differences between the business model of insurance and banking."
Whit Cornman, a spokesman for the American Council of Life Insurers, agreed, saying in an e-mail, "We agree with the Senators that bank-centric capital requirements should not be applied to insurers."
In an earlier comment letter sent to Bernanke, Curry and Gruenberg, the ACLI said the state risk-based capital requirements recognizes "that premiums are collected in advance and invested ahead of anticipated claims, that insurers have relative predictability of those claims, and that products have safety mechanisms such as surrender charges to protect against illiquidity."
At least one large insurance company has already been caught up in the new capital requirements.
In March, MetLife Inc. failed a Fed stress test after the central bank determined that the life insurer's capital management plan did not meet new capital standards. MetLife fired back at the Fed, saying that the capital standards laid out by the stress test are inappropriate for insurance companies.
In June, Best's News Service reported that the Fed gave MetLife until Sept. 30 to resubmit a capital plan under the bank's capital plans rule. MetLife disclosed the extension in a Form 8-K filed with the U.S. Securities and Exchange Commission.
In addition to Brown and Johanns, the letter was signed by Sens. Max Baucus, D-Mo.; Richard Blumenthal, D-Conn.; Roy Blunt, R-Mo.; Saxby Chambliss, R-Ga.; Mike Crapo, R-Idaho; Richard Durbin,D-Ill.; Chuck Grassley, R-Iowa; Kay Hagan, D-N.C.; Tom Harkin, D-Iowa; Kay Bailey Hutchison, R-Texas; Johnny Isakson, R-Ga.; Robert Menendez, D-N.J.; Jeff Merkley, D-Ore.; Jerry Moran, R-Kan.; Ben Nelson, D-Neb.; Pat Roberts, R-Kan.; Chuck Schumer, D-N.Y.; John Tester, D-Mont.; Patrick Toomey, R-Pa.; and Mark Udall, D-Colo.