Support of the Insurance Capital Standards Clarification Act of 2014by Former Representative Gary G. Miller
Posted on 2014-12-11
in the house of representatives
Thursday, December 11, 2014
Mr. GARY G. MILLER of California. Mr. Speaker, I along with Mrs.
McCarthy of New York have authored legislation to address the capital
requirements that apply to insurance companies under federal
supervision pursuant to the Dodd-Frank Act. This legislation would
strengthen the regulatory regime applicable to federally supervised
insurance companies by
ensuring that they are not subject to bank-centric capital standards.
One of the central elements of the Dodd-Frank Act's financial reforms was stronger capital rules for both banks and certain non-bank financial institutions. Two sections of the Dodd-Frank Act expanded Federal Reserve authority to regulate large banks and imposed increased capital requirements--Section 165, which applies to large bank holding companies and to non-bank systemically important financial institutions (SIFIs), and Section 171, which applies minimum capital standards to insured depository institutions, depository institution holding companies, including insurance savings and loan holding companies, and to SIFIs.
We have been disappointed by the Federal Reserve's failure to recognize that they have the authority to implement the Collins amendment as it applies to insurers in a manner that tailors the capital requirements for the insurance business model. We continue to believe that the regulators could solve this problem using their existing authority. Our House bill, H.R. 4510, shows that there is strong bipartisan support for addressing this issue, with 227 of our colleagues cosponsoring the bill. A slightly amended version of our legislation, which we support, passed the Senate with unanimous support in early June, and passed the House as part of a larger package in July of this year. We are pleased that final action on this legislation is imminent, and hope it will be sent to the President before the end of the session.
Our bill (and the Senate version, S. 2270) is narrowly crafted to only address this issue as it relates to federally supervised insurance companies, including SIFIs and insurance savings and loan holding companies. Under the legislation banks will be subject to the full force of the Collins Amendment. That is as it should be, and we will not change that.
To accomplish the goal of directing the Federal Reserve to tailor rules for insurance, our legislation permits the Federal Reserve to create a non-Basel III regime for the insurance operations of supervised entities. The legislation allows the Fed to work with state insurance regulators to develop appropriate insurance-based capital standards for federally supervised insurance companies. Alternatively, the Fed could defer to state insurance regulators for the capital standards that should apply to the insurance activities that they regulate.
The bill clarifies that, in establishing the minimum leverage capital and risk-based capital standards under Section 171, the Federal Reserve Board is not required to include activities or companies that are engaged in the business of insurance and are subject to state insurance regulation, including state insurance capital requirements. Similarly, regulated foreign affiliates or subsidiaries engaged in the business of insurance and subject to foreign insurance regulation and foreign insurance capital requirements that have not been deemed to be inadequate also may be excluded from Section 171 capital standards. It is worth noting that the Government Accountability Office found that the state risk-based capital rules performed well during the financial crisis.
The bill allows the insurance capital requirements that have been effective to continue to determine the capital requirements for the activities of insurance companies and groups that are supervised by the Federal Reserve Board. Furthermore, activities of a holding company supervised by the Federal Reserve Board that are not the business of insurance would remain subject to the capital standards under Section 171. In determining insurance versus non-insurance activities of a supervised entity, the legislation provides regulators with the flexibility to tailor the rules for certain affiliates or subsidiaries of insurance companies that are necessary to the business of insurance, including, for example, affiliates or subsidiaries that support insurance company general and separate accounts.
Our legislation defines ``business of insurance'' by reference to Section 1002 of the Dodd-Frank Act, and under this definition the business of insurance means ``the writing of insurance or the reinsuring of risks by an insurer, including all acts necessary to such writing or reinsuring and the activities relating to the writing of insurance or the reinsuring of risks conducted by persons who act as, or are, officers, directors, agents, or employees of insurers or who are other persons authorized to act on behalf of such persons.'' The reference to this definition of the ``business of insurance'' will help ensure that insurance activities of federally supervised companies are subject to tailored capital rules, whether those activities are undertaken by the insurance companies themselves or by their affiliates or subsidiaries on their behalf.
We also want to ensure that the Federal Reserve uses its authority to tailor capital rules for insurance operations of entities under its supervision, regardless of the size of the subsidiary insured depository institution. As we have stated, under this legislation and under current law, the Basel banking regime and the Collins Amendment requirements will continue to apply to all insured depository institutions. It would be at odds with sound public policy and the intent of this legislation for the Federal Reserve to impose a Basel banking capital regime on the entire enterprise of an insurer that happens to also own a sizable insured depository institution--the depository institution in that operation will already be subject to banking rules, but the insurance operations should not be.
Another important provision of our legislation addresses the issue of insurance accounting for a small number of non-publicly traded insurance companies. While every publicly traded company in the United States is required by the Federal Securities laws to prepare consolidated financial statements under Generally Accepted Accounting Principles (GAAP), all insurance companies in the United States-- whether in mutual or stock form of organization--are required by their state insurance regulators to utilize an accounting method known as Statutory Accounting. Indeed, most mutual insurance companies only use Statutory Accounting in preparing their financial statements.
Statutory Accounting Principles (SAP) are generally more conservative than GAAP because they are specifically designed to promote insurer solvency and the ability to pay claims instead of measuring an insurer's value as a going concern. SAP does not allow a number of non- liquid or intangible assets to be included on an insurer's balance sheet and provides less favorable accounting treatment for certain expenses. In both the text of the Dodd-Frank Act and its legislative history, Congress recognized the acceptability of SAP for holding companies engaged in insurance activities coming under Federal Reserve jurisdiction. Specifically, Congress (1) directed the Federal Reserve to rely on existing reports and information provided to state and other regulators (which for insurance companies would have been prepared according to SAP); and (2) included Senate report language stating that Federal Reserve assumption of jurisdiction over savings and loan holding companies engaged in the business of insurance did not reflect a mandate to impose GAAP. However, in proposed rulemakings, the Federal Reserve expressed its intention to require all companies to eventually prepare GAAP financial statements--consistent with their existing model for all bank holding companies. Imposing such a mandate on companies using only SAP would cost insurers a substantial amount to take on multi-year financial projects yielding minimal--if any--supervisory benefit to regulators. Additionally, we believe the principle of preserving SAP should apply to any international discussions relating to insurance.
This bill makes clear that under Section 171 of the Dodd-Frank Act and the Home Owners' Loan Act, such a mandate is inappropriate where the holding company is a non-publicly traded insurance company that is only required to prepare and file SAP statements. Nothing in this provision prevents the Federal Reserve from obtaining any information it is otherwise entitled to obtain from a SAP-only insurer.
We and the many other supporters of this bill are pleased that the House is poised to consider a final version of this legislation and look forward to it reaching the President's desk soon. We expect regulators to follow through with appropriate, tailored capital rules for insurers under their supervision.