The Fed’s Plans for ‘Too Big to Fail’ Insurance Companies

When the Dodd-Frank Act came into play, the Federal Reserve took up regulatory responsibilities both for insurance holding companies that own a federally insured bank or thrift and for insurance companies designated as systemically important by the U.S. Financial Stability Oversight Council (FSOC).

This transition brought about many changes for insurance companies, and today, Fed Governor Daniel K. Tarullo spoke at the National Association of Insurance Commissioner’s International Insurance Forum, Washington, D.C., to clarity what the agency's role is and is not in regulating insurance companies and how too big to fail companies will be addressed in the near future.

According to Tarullo, the U.S. insurance industry makes up a large portion of the U.S. economy. Last year, written premiums in all sectors totaled nearly $2 trillion and earned premiums totaled nearly $1.8 trillion, representing increases from 2014 of approximately 6 percent and 4 percent, respectively. These numbers represent over 7 percent of the U.S. gross domestic product.

"If the positions of the insurance company are large enough, it could become a potential vehicle for transmitting distress at the company to other parts of the financial system," Tarullo explained.

He added that the Fed "should distinguish between insurance companies that we oversee solely because they own an insured depository institution and those that have been designated as systemically important by the FSOC. This is precisely the path we are taking with regard to our supervision of these firms."

Tarullo broke down the Fed's role in regulating insurance companies in four ways:

1. As was the case prior to the enactment of the Dodd-Frank Act, we are responsible for protecting the safety and soundness of federally insured depository institutions affiliated with any kind of holding company.
2. The Dodd-Frank Act sharpened our statutory mandate to make clear that the Federal Reserve is to regulate and supervise holding companies with a view to the safety and soundness of not only the holding company itself, but also its functionally regulated subsidiaries, including affiliated insured depository institutions. Again, while the particulars differ, this mandate applies to SLHCs as well as to bank holding companies.
3. The Dodd-Frank Act also changed our statutory mandate to require that we regulate holding companies so as to promote the stability of the financial system as a whole. This means paying attention to interconnections among financial firms, correlations of asset holdings, and other characteristics that could endanger the nation's financial stability during periods of stress.
4. For all the broadening of our statutory mandate, one feature of the financial regulatory system that the Dodd-Frank Act preserved was the functional regulation of holding company affiliates based on the kind of financial intermediation in which they are engaged.

Tarullo noted that the Fed is also to develop a regulatory framework for its supervised insurance companies based on requirement from the Dodd-Frank Act that authorizes the Board to establish minimum capital requirements for both systemically important insurance companies and SLHCs and bank holding companies predominantly engaged in insurance activities.

Systemically important insurance companies will have to establish enhanced standards in order to mitigate risks to U.S. financial stability that could arise from the material distress, failure, or ongoing activities of these companies, Tarullo stated.

"The Board's prudential regulatory objectives pertaining to supervised insurance companies are to protect the safety and soundness of the consolidated company, to protect any subsidiary depository institutions of the company, and to mitigate any threats to financial stability that might be posed by the activities, material financial distress, or failure of the company," Tarullo said. "Just as we have done with other non-bank financial intermediaries for which we have been given regulatory responsibilities, we will fashion a regime that takes account of the particular characteristics and risks of those intermediaries."

He continued, "Our tentative conclusion is that a bifurcated approach to a capital regime for insurance companies makes sense in light of these considerations."