The Dodd-Frank Act opened the door for the U.S. Treasury to oversee nonbank financial companies that presented a systemic risk to the U.S. financial system. That raised the question of what insurers might fall within that category. The answer to that question got a little closer to being answered last week, when tihe Financial Stability Oversight Council (FSOC) issued the final rule and guidance for identifying nonbank companies that pose systemic risk. As Treasury reported on April 3:
The Financial Stability Oversight Council ("the Council") today took another key step toward increasing oversight and addressing risks to U.S. financial stability by issuing the final rule and guidance that details the analysis and process the Council intends to use when determining which nonbank financial companies should be subject to enhanced prudential standards and to supervision by the Board of Governors of the Federal Reserve System. This authority is an important component of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("the Dodd-Frank Act") and is one of a number of tools now available to constrain risk and help prevent future financial crises. With this vote, the Council will begin a three-stage designations process. Secretary Geithner, the chairperson of the Council, has indicated that the Council will work to make the first of these designations this year.
FSOC has preliminarily indentified a financial threshold of $50 billion in annual revenue for nonbank companies considered to be Systemically Important Financial Institutions (SIFIs), according to Howard Mills, chief advisor with the Deloitte Center for Financial Services and Deloitte LLP's (New York) insurance industry group.
"The bigger question now is whether FSOC will now add more qualitative critieria, including 'interconnectivity' or linkage to other financial institutions," Mills says. "You don't have to be a very large company to have a high degree of interconnectivity."
[For more on federal involvement in insurance regulation, check out Data is Crucial to Insurance Regulation, FSOC Members McRaith, Huff Say.]
Questions also remain as to FSOC's treatment of U.S. subsidiaries of large foreign-domiciled companies, Mills notes. While these companies may be comfortably within the financial threshold, their subsidiaries may not. As matter stand, it's also unclear whether G20 regulators will define SIFIs the same way.
FSOC's rule-issuing hasn't produced any surprises, but it has brought the potential systemic risk-regulation of some insurers a little closer to being realized, Mills suggests.
"[FSOC's] initial criteria do allow for some insurers to potentially be designated as Systemically Important Financial Institutions," Mills says. "Whether the other criteria will allow them to be swept in remains to be seen, but there's a consensus among industry observers that some insurers will embraced by this supervision."