The National Association of Mutual Insurance Companies (NAMIC) in a letter to the Financial Stability Oversight Council (FSOC) stated that the insurance company investment model should be exempted from a new federal rule, known as the "Volcker Rule", governing proprietary trading. The NAMIC cited strong current state regulation as the basis for this exemption. Additionally, the letter also cited congressional intent that insurers be given wide latitude in continuing their current investment policies despite the new rule.
The NAMIC letter is asking for comment from federal regulators on the implementation of the new federal rule as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The provision seeks to impose stronger federal oversight on financial services companies that engage in proprietary trading and enter into joint ventures with hedge funds and private equity funds.
The NAMIC letter said that allowing insurers to invest only in low-yield government securities “would create the need to charge higher premiums on policies for consumers.” It went on to explain that these dollars come from premiums collected from customers in return for a promise to pay on a potential future claim. “Those premium dollars are invested by the insurer to ensure that future claims are able to be paid,” the letter said.
NAMIC cited in its letter a provision of the Volcker Rule that provides an exemption for an insurance company acting on behalf of its general account.
The letter said that imposing investment limitations on property and casualty insurers structured as mutual thrift holding companies “would have the unintended consequence of severely restricting investment options, including ones that involve minimal risk.”
The letter said that Congress realized that application of the Volcker Rule to insurance companies would prevent an insurance company from makingproperly diversified and allocated investments to support their insurance operations and to meet their customers’ needs.
The letter said it “would be economically punitive” for insurers if their investment trading were restricted in such a way that they could no longer pursue their long-established basic business models.
“These core insurer investment practices did not pose a significant risk to the national economy during the recent economic crisis and are not considered to be a contributing factor to systemic risk to the economy in the future,” the letter states.
The letter adds that state insurance investment laws currently impose strict limits on the types of investments that p&c insurance companies may utilize from both a qualitative and quantitative standpoint.
“The general aim of the state insurance investment laws is to protect the safety and soundness of the insurance institution while also protecting the interests of customers by promoting insurer solvency and financial strength,” the letter notes.
The letter says that “in order to appropriately accommodate fundamental insurance investment practices,” the FSOC study should recommend that the current insurance regulatory system be recognized “as proper and effective protection for the safety and soundness of any banking entity within an insurance institution as well as the United States financial system as a whole.”
The letter states, “By allowing insurers to continue in their normal regulated investment activity from their general account, including engaging in proprietary trading and ownership of interest in securities such as private equity and hedge funds, the FSOC study would comply with legislative intent that clearly meant to preserve this system and exclude the insurance company investment model from application of the Volcker Rule.”