Trade Groups Again Make Case to FSOC on Proposed SIFI Rule

Written on January 9, 2012 – 8:31 pm | by Brayden Sani

The three trade groups representing the majority of property and casualty insurers reiterate in a letter to the Financial Stability Oversight Council that property and casualty insurance carriers by their very nature do not pose a threat to the financial stability of the U.S.

The letters, by the American Insurance Association, the National Association of Mutual Insurance Companies and the Property Casualty Insurers Association of America, laud the FSOC for its revised proposal regarding the metrics it will use in determining whether a non-bank constitutes a systemic risk to the system.

But they suggest a final rule should be significantly revised to reflect the nature of insurance companies.

The letters were sent in response to a request for comment on what method should be used for determining whether a non-bank is a systemically important financial institution (SIFI) and therefore subject to Federal Reserve Board as well as state oversight.

The FSOC re-proposed the rule, first proposed last November, in response to strong criticism both within the industry and by a number of members of Congress.

The FSOC’s proposed rule and additional guidance “is responsive to criticism that the [first proposed] rule was not transparent,” says J. Stephen Zielezienski, AIA senior vice president and general counsel.

But, he adds, the FSOC “still has some work to do to make sure that the final rule screens out those companies that don’t pose a threat to U.S. financial stability, while concentrating on those few entities that could be a source of another crisis.”

In its unsigned comment letter, NAMIC says it is “pleased” that the thresholds and criteria identified in the latest proposal “seem to indicate that [P&C] insurers will not be the focus of the FSOC’s designation efforts.”

But, the letter says, “In the event that the FSOC does consider any [P&C] insurer for designation, it will be imperative to keep in mind the industry’s solid track record on solvency, and the financial and structural underpinning of the industry that has historically served as a source of stability for the broader economy.”

Writing on behalf of the PCI, Robert Woody, senior counsel, policy, says, “It is vitally important that the FSOC establish mechanisms that will allow it to focus on those companies that are truly capable of posing systemic risk.”

Woody says the FSOC “is wise to seek to avoid drawing non-risky companies into the systemic-risk review process as this will avoid needless costs and burdens both for the [FSOC] and for non-risky companies and their stakeholders.”

According to AIA, the FSOC’s inclusion of a three-stage process and specific discussion of quantitative standards introduces more transparency. In particular, Stage 1 of the process, based on whether a company meets certain metric triggers, allows companies to be screened out of the process where they do not meet the thresholds, Zielezienski says.

But he adds that AIA has requested additional revisions to the proposed rule and to the guidance so that the rule follows Dodd-Frank Act intentions to designate only those companies for heightened prudential supervision that are a source of systemic risk.

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