In this light, last year’s legislative victories seems
tenuous and reversible. Even if the final the rule-mak-
ing phase closes largely to the insurance industry’s lik-
ing, the uncertainty surrounding how the DFA would
be implemented already has impacted the insurance
industry in observable ways. Faced with an extended
period during which they won’t know what will be
expected of them in terms of compliance demands
and costs, or even whether they can remain viable in
certain markets, some insurers have opted to restruc-
ture. Notably, insurance companies that own a thrift
may have good reason to question whether the new
resolution’s authority granted to the Federal Deposit
Insurance Corp. will enable it to reach into an insur-
ance company to retrieve money for a failed bank op-
erating within the same holding company.
This seemed to be the case in February when All-
state announced it was getting out of the baking busi-
ness. “Allstate Financial has refocused on insurance,
retirement and investment products,” Matthew Win-
ter, president and CEO of Allstate Financial, said at the
time. “That, combined with the changing regulatory
environment, led us to the determination that oper-
ating Allstate Bank is no longer core to our long-term
strategy.”
The DFA may already be distorting the insurance
market in other ways. Howard Mills, director & chief
advisor, Insurance Industry Group, Deloitte LLP, spec-
ulates that fear of compliance risk is blunting M&A ac-
tivity. “There are many big companies with a lot capi-
tal that are looking at acquisitions, but they haven’t
pulled the trigger,” he says. “One of the reasons is that
they don’t know what type of regulatory risk they are
incurring if they take that on. You now have more op-
portunity to get into more regulatory trouble.”
NO SEAT AT THE TABLE
Conceived as a supergroup of regulators, the FSOC is
intended to identify and oversee firms that may pres-
ent a systemic risk to the financial system. In total, the
FSOC is made up of 10 voting members and five non-
voting members. The voting members consist of nine
people from federal financial regulatory agencies as
well an independent member with insurance exper-
tise. The non-voting members include the head of the
newly minted Federal Insurance Office (FIO), and a
state insurance commissioner selected by the National
Association of Insurance Commissioners (NAIC).
While the two non-voting members are known—fu-
ture Federal Insurance Office Director Michael McRaith
and Missouri Director of Insurance John Huff—the iden-
tity of the FSOC’s voting member with insurance ex-
pertise remains a mystery. “As far I know, there hasn’t
been any name put forth by the White House,” says
Ben McKay, SVP of federal government relations of the
Property Casualty Insurers Association of America.
The absence of a voting insurance expert on the
FSOC is especially troublesome, McKay says, as the
FSOC has already begun work on rules that have the
potential to significantly impact the insurance indus-
try. “The reality is you don’t need to be promulgating
all these rules because all the proper pieces are not in
place.”
Mills notes that since the NAIC is considered a trade
association and not a regulator, Huff has not been al-
lowed to share information discussed at the FSOC
meetings he has attended with other state regulators.
“It seems ironic that so much of the impetus for DFA
was about transparency and openness, but the FSOC
is telling Huff he can’t communicate,” he says.
SECTION 113
For the insurance industry and FSOC, the nub of the
issue is Section 113 of the DFA, which concerns the for-
mula the FSOC will create to determine which com-
panies qualify as a “systemically important financial
institution (SIFI).” While the law was intended to tar-
get the institutions that comprise the shadow banking
system, until the rule is promulgated, insurers will not
know if they meet this designation.
Zielezienski says property/casualty insurers were
successful in convincing lawmakers during the draft-
ing of the DFA that they already were heavily regu-
lated as a function of their business models, and did
not engage in activities that were systemically risky. He
notes that while Congress made a specific decision to
apply heightened prudential supervision to banks that
exceed $50 billion in combined assets, they expressly
did not make that decision with respect to “non-bank”
financial services firms. Instead, lawmakers opted for
a more deliberative process to determine the formula
for calculating the systemic risk potential for “non-
banks” during the rule-making phase.
“The reality is you
don’t need to
promulgate all these
rules because all the
proper pieces are
not yet in place.”
the FSOC, insurers may have a harder time getting this
message across during the rule-making process. Thus,
the worry is that if an insurance company is of a certain
size, it still runs the risk of being tagged as a SIFI, even
if it meets none of the other threshold requirements
for being systemically risky. “Our concern is not only
that we don’t have a voting member on the panel, but
the fact that the rules don’t say anything more than
the statute,” Zielezienski says. “All we have to go on is
the proposed rule and the preamble of Dodd-Frank, so
the watch word here is ‘vigilance.’”
Grande agrees that until the criteria used to make
the SIFI designation are made explicit, large insurance
companies will have cause for concern. “It’s the secret
black box,” he says. “They won’t tell anybody the for-
mula they will use to evaluate the companies.”
McKay says that even after the FSOC comes up with
its rules regarding which companies are deemed sys-
temically risky, uncertainty will persist, as it will take
a while for the financial services industry to determine
whether a SIFI determination will hinder a company
in the marketplace, or give it a competitive advantage
for being perceived too big to fail. “We still don’t know
whether the SIFI designation be the ‘scarlett letter’ or
the ‘seal of approval,’” McKay says.
BIG CHALLENGES
Given the breadth of changes underway, McKay says
he is sympathetic to all the pressures regulators are
facing. “The Treasury Department is saddled with
writing hundreds of rules and staffing up,” he says.
“The delays are not for lack of caring or trying, they
are just overwhelmed.”
For example, he notes that the Office of Financial
Research (OFR), which was created as the source of in-
formation for the FSOC is yet to come into being. “The
OFR is at least two years away from being operation-
al,” he says. “They haven’t bought their first computer.
They still have to find a building and hire people.”
In addition to turning the lights on, McRaith will
