Background
There was a strong industry effort to education Congress on the life insurance industry to ensure that the Dodd-Frank Act would not be too bank focused and have unintended consiquesnse on our industry. However, the legislation left several important life insurance industry issues to be addressed through a formal rulemaking process that spans 13 different federal agencies with more than 150 directives. With so many outstanding issues and the lack of a clear timeline, a complete picture of the impact of the legislation is absent until the rulemaking process is complete.
The following summarizes major areas of interest to AEGON and other life insurers.
Federal Insurance Office (FIO)
A provision strongly supported by AEGON and the industry, the legislation creates for the first time a federal government office within Treasury (FIO) with expertise in insurance to advise Congress and the administration on insurance-related issues and to help negotiate international regulatory equivalency agreements. Michael McRaith, former Illinois Insurance Commissioner, took office as the first FIO director in June 2011.
Financial Stability Oversight Council (FSOC)
The Dodd-Frank Act creates a new oversight agency, FSOC that is charged with identifying threats to the U.S. economy, promoting market discipline, and responding to emerging risks to the stability of the financial system. The legislation ensures that three members of FSOC will have insurance-specific experience. One of these seats is to be appointed by the President with the advice and consent of the Senate, and will have voting rights. The Director of the FIO and a state insurance regulator also will serve on FSOC, but will not have voting privileges. To date the Insurance Expert has not yet been appointed by the President.
Derivatives; Stable Value
Life insurers, including AEGON, are major end-users of derivatives, which reduce risks insurers assume in protecting policyholders. Life insurers must prepare for claims which may not arise for 40 years or more and derivatives are indispensable in this process. These activities do not create systemic risks to the economy. Moreover, these activities are strictly and conservatively regulated under state insurance laws and regulations.
The legislation assigned the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) with responsibility for addressing issues such as the clearinghouse requirement (whether insurers’ swap activities must be traded through a clearinghouse or exchange) and the definitions of “major swap participant” and “major security-based swap participant.”
The CFTC and SEC have proposed that insurance products (eg., variable annuities) are to be excluded from regulation as swaps. The CFTC is to issue a study as to whether stable value products that are not regulated as insurance products, are also exempt from the definition of swaps.
Standard of Care
In an effort to increase the uniformity of the operating environments for broker-dealers and investment advisors, the legislation tasked the SEC to conduct a study and issue appropriate rules and regulations. The study’s findings were released in January 2011 and recommend the adoption of a uniform fiduciary standard governing the conduct of broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. The study further recommends regulatory harmonization when broker-dealers and investment advisers are performing the same or substantially similar functions.
The SEC may now address standard of care guidelines through rulemaking based on the recommendations of the aforementioned study. AEGON and the industry supports a harmonized standard of care for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. However, we believe any such standard must be carefully crafted so as to protect consumer access to a wide variety of financial advice, products, and services.
Consumer Financial Protection Board (CFPB)
One of the main goals in the crafting of the Dodd-Frank Act was to ensure consumers are adequately protected when purchasing certain financial services products. Life insurers’ products and market conduct are extensively regulated by the states. In recognition of state oversight, and to avoid duplicative regulation, the legislation largely excludes life insurance products from CFPB jurisdiction.
Systemic Risk/Resolution Authority
Life insurers are required under state laws to participate in guaranty associations in every jurisdiction where they are licensed to do business. These associations have the authority following the insolvency of an insurance company to impose assessments on licensed insurers to assure policyholder claims against the insolvent company are paid up to the limits of state law. The Dodd-Frank Act makes clear that insurance company insolvencies will continue to be resolved under state law. The FDIC can step in to initiate the wind down of a systemically important insurance company only if the insurance commissioner where the insurer is domiciled fails to take appropriate actions, a highly unlikely scenario.
Although life insurers may be subject to assessments if a financial company is resolved under the new federal authority, it is unclear to what extent life insurers will be affected by such assessments. Any systemic risk of foreign owned companies is to be determined based on the company's US assets; however, the Federal Reserve Board is required to coordinate with the parent company's regulator prior to imposition of any increased prudential standards.
Volcker Rule
The Volcker Rule was originally aimed at prohibiting insured depository institutions from engaging in excessively risky investment activities for their own accounts. Over the course of the debate, some members of Congress expanded the Volcker Rule beyond its original intent and applied proprietary trading and hedging restrictions not just to the depository institution, but to all subsidiaries and affiliates within a holding company that includes a depository institution.
The life insurance industry was initially concerned about the effect this rule would have on life insurers who are part of bank or thrift holding companies. However, under the legislation, life insurers are not subject to the proprietary trading prohibitions if the trades originate from general accounts or are done on behalf of customers, i.e. through separate accounts — accounts segregated from funds in insurers’ general accounts.
Collins Amendment
The Collins Amendment establishes higher “Tier 1” capital requirements for financial institutions that pose systemic risks. Risk-based capital rules are different for life insurers than for banks because life insurers address different types of risks. The amendment has the potential to affect life insurers even though life insurers calculate risk-based capital much differently than banks.
The Collins Amendment is an example of Congress applying bank-centered policy initiatives to the life insurance industry, even though these initiatives are not intended for life insurers and are wholly inappropriate in that context. The industry hopes that establishment of the FIO will provide members of Congress with advice on how rules intended for banks could have serious repercussions when applied to life insurers.
Non-Admitted and Reinsurance Reform Act
Life reinsurance is often defined as insurance for insurance companies. It allows a life insurer to spread risk and reduce its overall risk profile. The Non-Admitted and Reinsurance Reform Act was included in the Dodd-Frank Act and streamlines reinsurance regulation by giving the home-state regulator sole jurisdiction over a reinsurers’ solvency and accounting practices. AEGON and the industry fully supports this provision that will help insurers spread risk while maintaining the highest level of protection for consumers.