Fed's Tarullo Outlines Rules for Big U.S. Insurers--2nd Update
May 20 2016 - 11:28AM
Dow Jones News
By Ryan Tracy
WASHINGTON -- Big U.S. insurers Prudential Financial Inc. and
American International Group Inc. would face tougher capital
requirements than their peers under new rules outlined for the
first time Friday by the Federal Reserve's point-man on
regulation.
Fed governor Daniel Tarullo said the Fed will propose rules "in
the coming weeks" that will have higher compliance costs for
insurers considered "systemically important" to the U.S. financial
system.
That group currently includes AIG and Prudential, but not
MetLife Inc., which won a court case overturning its systemic label
earlier this year. The government has appealed MetLife's win.
The Fed gained authority for the first time to regulate
insurance companies under the 2010 Dodd Frank law, but has taken
more than five years to propose rules for the industry. Mr.
Tarullo's remarks Friday were the central banks most detailed
description to date of the pending regulations.
Mr. Tarullo didn't give all the details of the Fed rules, but he
sketched them out in a speech to the National Association of
Insurance Commissioners, a group of state regulators. He said the
Fed will propose different rules for systemic insurers than for
other insurance companies it regulates.
The central bank also regulates a dozen U.S. insurance companies
that own banks, including Nationwide Mutual Insurance Co. and State
Farm Mutual Automobile Insurance Co.
"Our tentative conclusion is that a bifurcated approach to a
capital regime for insurance companies makes sense," Mr. Tarullo
said.
The rules for non-systemic insurance companies are likely to
have a "relatively low regulatory burden," aggregating capital
requirements that already exist at the state level, Mr. Tarullo
said.
Prudential and AIG are likely to face a different capital
requirement based on "risk segments," with the Fed placing assets
and liabilities in categories based on the potential risks they
pose to the company and the financial system, Mr. Tarullo said. The
companies would have to maintain more capital against segments with
higher risk, he said, adding that the rules for systemic firms
would result in higher compliance costs.
Mr. Tarullo said the Fed also intends to impose stricter rules
on systemic firms in the areas of corporate governance, risk
management, and liquidity, following on a mandate from Congress to
set out tougher standards on firms that have a size and complexity
that a crisis at that institution could ripple through the broader
financial system, the way AIG's woes aggravated the 2008 financial
crisis.
He said the firms would likely face capital and liquidity
"stress tests" examining their ability to fund themselves and keep
operating in a crisis.
Mark Grier, vice chairman of Prudential, said on the sidelines
of the conference after Mr. Tarullo's speech that it was too early
to tell the impact of the coming Fed proposal.
"Details will matter," he said in a brief interview. "I think
they are on a good track in terms of the time they spent thinking
this through and I'm optimistic that the details will come out in a
way that reflects the right considerations for insurance as well as
the right calibration relative to our risks and our balance
sheet."
Mr. Grier said the Fed's approach looks "very different" from
the current state risk-based capital regime and he will be
particularly focused on adjustments Mr. Tarullo said the Fed will
make to the way his company's balance sheet is measured based on
generally accepted accounting principles.
An AIG spokeswoman had no comment.
State regulators were also listening to the speech closely. They
have been developing their own regime for looking for risks across
insurance companies after the AIG debacle.
"It sounds like, at least at first blush, that we are very
aligned," said John Huff, director of the Missouri Department of
Insurance and president of the state insurance commissioner's
group, in an interview.
"Everybody accepts" that systemic insurance firms will face
higher capital requirement from the Fed, "so I don't think that is
something that is of concern. The question is just how is it
structured," he said.
Mr. Tarullo said the Fed would issue an "advance notice" of the
rules, giving the industry multiple chances to comment on them.
Separately, Mr. Grier said Prudential is closely watching
whether MetLife ultimately wins its legal battle to overturn
stricter federal oversight. "We are going to do what is in the best
interest of the company as we see how this plays out. We will be
paying attention to the appeal," he said. "It is a real-time
problem for us because there is a lot more yet to play out."
Write to Ryan Tracy at ryan.tracy@wsj.com
(END) Dow Jones Newswires
May 20, 2016 12:13 ET (16:13 GMT)
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