Federal Reserve: Some Insurance Companies ‘Too Big To Fail’ - from TRUNEWS

The Federal Reserve will soon take up rules for insurance companies deemed “too big to fail” intended to head off risks to U.S. financial stability, as well as requirements on how much capital firms across the industry should hold, Fed Governor Daniel Tarullo said on Friday.

The capital requirements to be unveiled in the coming weeks will follow two tracks: one for the handful of insurance companies designated as “systemically important” and one for smaller holding companies that own banks.

Under the Dodd-Frank Wall Street reform law, federal regulators can determine that non-bank companies such as American International Group Inc could put the entire financial system in danger if they fail, and require they take certain measures to stave off threats to the country’s financial stability.

In a speech to the National Association of Insurance Commissioners, Tarullo said he expects the standards for systemically important insurance companies to “build on the core provisions of our consolidated supervisory framework” for large banks and adjust for the unique nature of the industry.

The liquidity requirements will likely involve stress-testing, cash flow projections, contingency plans for liquidity stress events, and internal controls, he added.

For capital requirements for insurance holding companies, the Fed is looking into a “building block approach,” aggregating capital resources and requirements across their different entities to calculate “combined, group-level” requirements, he said.

The approach “would efficiently leverage existing legal entity-level regulatory capital frameworks that already apply to the various units,” and impose a “relatively low regulatory burden for these entities,” he said.

It would produce “capital requirements that are reasonably well tailored to the insurance-related risks for each distinct jurisdiction and business line,” Tarullo added.

For the second set of requirements for systemically important companies the Fed is working on a “consolidated approach” using “… risk factors that are more appropriate for the longer-term nature of most insurance liabilities,” he said.

The Fed would categorize assets and liabilities into risk segments, apply risk factors to the amounts in each segment, then set a minimum ratio of required capital comparing the consolidated capital requirements to consolidated capital resources, Tarullo said.

Insurer MetLife Inc (MET.N) won a major regulatory and legal battle in March when a federal judge struck down the U.S. government’s determination that it is “too big to fail.”

MetLife had argued in court that the Financial Stability Oversight Council, made up of the heads of the country’s financial regulatory agencies, used a secretive and flawed process when in 2014 it designated the company as a systemically important financial institution.

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