State insurance regulators and U.S. insurance companies are letting out big sighs of relief following the Federal Reserve Board of Governor’s outline of its long-awaited capital requirements for insurers.
Fed Governor Daniel Tarullo revealed last week that the regulator is poised to release an early rule proposal that will – in accordance with its mandate under the 2010 Dodd Frank Act – tell the most financially important insurers how to keep their books and how much capital they need to hold in reserves to maintain financial stability. The proposal will impose similar requirements on any insurers that own bank holding companies or act as savings and loan institutions, but with less stringent accounting requirements, Tarullo said.
So, after five long years of waiting – along with speculation that the rules could drive a wedge between federal and state regulators working on their own requirements and concern that the rules would reflect stricter requirements designed with banks in mind – initial reaction to the Tarullo outline was cautiously optimistic.
“We’re encouraged by the comments that Governor Tarullo made,” John Huff, president of the National Association of Insurance Commissioners (NAIC), told Bloomberg BNA at the state regulatory group’s 10th annual International Insurance Forum.
The Fed’s rule would require each insurance company to disclose to federal regulators its total assets including subsidiaries, making each insurer responsible for maintaining capital reserve levels sufficient to deal with a hypothetical collapse of the whole group. Both the NAIC and the International Association of Insurance Commissioners (IAIS) are developing proposals aimed at addressing similar concerns and establishing capital requirements, though the biggest differences are expected to occur over the levels of reserves that will be required and the way those levels will be set.
Huff said the Fed’s plan to release details in an advanced notice of proposed rulemaking is a “very positive step that will allow more stakeholder input.”
Similarly, industry said the Fed’s proposal doesn’t seem like it would cause insurers to drastically change their accounting methods, which should keep regulatory compliance less costly than the developing proposal from the IAIS, which U.S. lawmakers, state regulators and U.S. insurers has consistently criticized.
Phillip Carson, associate general counsel and director of financial regulatory policy for the American Insurance Association, told Bloomberg BNA that the “beauty and advantage” of the Fed’s proposal is that it “utilizes what companies are already complying with on a legal basis and adds them together.”
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