In the wake of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). After Americans quickly learned that financial institutions previously thought “too big to fail” could, in fact, fail, Dodd-Frank equipped the Federal Reserve with unprecedented regulatory power to ensure safeguards were in place to prevent a similar crisis in the future. Dodd-Frank established the Financial Stability Oversight Council (FSOC), a government organization which has the authority to designate financial institutions as Systemically Important Financial Institutions (SIFIs). A non-bank financial institution may be designated as a SIFI if FSOC determines that material financial distress of the company, or the nature, scope, size, scale or mix of its activities could pose a threat to the financial stability of the United States. Once designated, a SIFI will experience heightened levels of supervision and regulation by the Federal Reserve Board (the Fed) including, possibly, enhanced capital requirements in the future. Further, a SIFI would enter receivership under a special resolution process administered by the Federal Deposit Insurance Corporation in the event of its eventual failure. On September 4, 2014, FSOC voted in favor of designating MetLife as a SIFI.
MetLife is one of four U.S.-based insurers to receive the SIFI designation along with Prudential, AIG and GE Capital. Kenneth Kobylowski, the Commissioner of the Department of Banking and Insurance in New Jersey, where Prudential is domiciled, fought unsuccessfully against FSOC’s designation of Prudential Financial as a SIFI, as described in an article in Airroc Matters (Summer 2014 edition, entitled NJ Lights the Way: Kobylowski’s Robust Regulatory Agenda).
Kobylowski’s position is similar to that of Connecticut Insurance Commissioner Thomas Leonardi, who, like most state insurance regulators, opposes FSOC’s application of SIFI status to insurers. In an interview with World Risk and Insurance News, Leonardi indicated that FSOC rendered its decisions, particularly with respect to Prudential Financial, based solely on the size of the institutions and the hypothetically vast assets they would be required to liquidate in the event of a global (or even national) financial crisis. Leonardi argued that the realities facing banks and insurers are fundamentally different such that the SIFI designation for insurers is inappropriate. In his view, the consumer nature of life insurance makes it highly unlikely that an insurer would unilaterally cancel or otherwise dispose of policies in the event of financial catastrophe.
Prudential Financial appealed its SIFI designation but did not prevail. AIG and GE Capital elected not to appeal their designations. Like the others, MetLife has the right, and has vowed, to appeal the designation. After FSOC’s decision, MetLife’s CEO Steven Kandarian said, “MetLife is not systemically important under the Dodd-Frank Act criteria. In fact, MetLife has served as a source of financial strength and stability during times of economic distress, including the 2008 financial crisis.”
MetLife has 30 days to file an administrative appeal with FSOC. After a hearing, FSOC will render its final decision. MetLife’s last option to remove the designation is a federal lawsuit seeking an order rescinding the designation. MetLife opposes the designation because the stricter regulations and oversight, in particular by the Federal Reserve (Fed), could render it less competitive. The impact may be felt by MetLife’s customers as well, through some combination of reduced benefits and higher premiums to compensate for the costs imposed by the Fed’s regulatory scheme for SIFIs.
In an article in Reactions in June 2012, Moody’s stated that, “Designation as a non-bank SIFI is credit positive for these issuers,” specifically positing that increased Fed oversight would give customers added security regarding their finances.
MetLife’s designation as a SIFI has raised a number of questions regarding FSOC’s process for making such determinations. Some have challenged the committee’s communication and transparency, finding it difficult to decipher the rationale for its decision. Nevertheless, the process of reversing FSOC’s decision is both difficult and costly. As a result, none of the other insurers which were designated non-bank SIFIs have availed themselves of an appeal and a federal lawsuit. The burden of proof, however, would likely be high in any federal lawsuit attempting to seek reversal of the designation.
The Fed has not yet promulgated rules and regulations pertaining to non-bank SIFIs. In addition to the general uncertainty of the regulatory environment, insurers perceive that the Fed is predisposed to impose the same rules and regulations on both banks and insurers. This may result in non-bank SIFIs, such as MetLife, being subject to the same capital standards as banks. Many believe this would be highly inappropriate in view of different risks faced by the different types of financial institutions and in view of the greater safeguards in state insurance regulation, as was highlighted by the General Accounting Office in its June 2013 report entitled Insurance Markets: Impacts of and Regulatory Response to the 2007-2009 Financial Crisis. Equivalence of regulatory treatment in the banking and insurance industries may actually introduce greater risk to the financial system than it eliminates.
To respond to this specific problem facing insurers, Senator Susan Collins (R-ME) has introduced legislation (S. 2270), which would amend Dodd-Frank to allow “federal regulators to take into account the distinctions between banking insurance and the implications of those distinctions for capital adequacy.” The amendment further seeks to exempt insurers from the Fed’s regulatory scheme. Lastly, it provides a mechanism for the Fed to exempt foreign insurance entities owned by a U.S. holding company. In June, the Collins Amendment passed the Senate. It now awaits a vote in the House of Representatives.
Ultimately, the consequences facing MetLife, as well as the other SIFI insurers, arising out of FSOC’s decision hinges on the success of the Collins Amendment and the content of the rules and regulations to be promulgated by the Fed in the near future.