Insurance companies will receive a temporary exemption from a final Basel III-based capital rule, giving the Federal Reserve Board more time to "evaluate the appropriate regulatory capital framework for these entities," the board said.
The temporary exemption will apply to savings and loan holding companies that derive more than 25% of their total consolidated assets from insurance underwriting activities.
The Fed's decision provides an answer, albeit a temporary one, to a question created by the Dodd-Frank financial reform act about whether banks and non-bank financial institutions like insurance companies must meet the same capital standards. The Federal Reserve Board has interpreted a provision in the Dodd-Frank Act as requiring insurers to comply with the Basel III global capital standards.
Basel III focuses on capital adequacy, market liquidity risk and stress testing. Representatives of some of the largest economies in the world developed the standards to avoid another financial crisis that left the global economy reeling. Last year, the Fed announced it would implement virtually all of the Basel III standards. In its announcement, the Fed did not set a date for when a final decision will be made on capital rules for insurance companies.
The industry has argued that applying bank-centric capital and liquidity rules similar to the Basel III framework to insurers would put them at a competitive disadvantage because the business of insurance is fundamentally different than the business of banking (Best's News Service, May 2, 2013).
The Fed said in a statement accompanying the announcement that members of the board received comments from the insurance industry that "expressed concern that bank-centric rules would conflict with the capital requirements of state insurance regulators and provide regulatory incentives for unsound asset liability mismatches."
Industry representatives wasted no time in coming out in support of the Fed's announcement.
Shortly after the announcement was released, J. Stephen Zielezienski, senior vice president and general counsel for the American Insurance Association, said the industry would like to see the exemption become permanent. "We hope that, as the Board further reviews its action, it will make this exemption permanent so that companies that are actively engaged in the business of insurance and subject to Board supervision will not be forced to adopt an inappropriate capital framework that could weaken their ability to compete," Zielezienski said in a statement.
The industry has also been pushing Congress to enact legislation that prohibits the Basel III capital standards from being applied to insurance companies. Last month, a bill was introduced in the U.S. House that would grant the exemption to insurance companies.