Washington , D.C., (June 25, 2010) -- The American Council of Life Insurers (ACLI) recognizes the extraordinary effort that went into developing legislation to reform financial regulation in the United States. In particular, we acknowledge the leadership of Senate Banking Committee Chairman Chris Dodd (D-CT), House Financial Services Committee Chairman Barney Frank (D-MA), Ranking Senate Banking Committee Member Richard Shelby (R-AL) and Ranking Financial Services Committee Member Spencer Bachus (R-AL).
Throughout the legislation’s development, ACLI worked vigorously to explain our industry—and how it differs from banks and investment firms—to members of Congress and the administration. Many of our initial concerns were addressed. We appreciate the willingness of policymakers on Capitol Hill and in Treasury to listen to us and learn about the vital role life insurers’ play in the nation’s economy and in the financial protection of tens of millions of Americans.
Still, the final legislation reflects a bank-centered approach to regulation that does not always mesh well with the life insurance industry, our existing regulatory structure and the way we address consumer needs.
This long, complex legislation leaves several important life insurance industry issues to be addressed through a formal rulemaking process. We will not have a complete picture of the impact of the legislation until that process is complete.
With those caveats, our initial review suggests that the final legislation likely will not unduly harm life insurers or our customers.
The following represents a summary of major life insurance company issues:
Derivatives
Life insurers 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 assigns the SEC and CFTC with responsibility for addressing ACLI’s key concerns, 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.”
ACLI is confident it can make a strong case to the SEC and CFTC on how life insurers use derivatives to reduce risk and why we should be excluded from the definitions of “major swap participant” and “major security-based swap participant."
”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.
Due to lack of understanding of our industry by some policymakers, the 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 final bill, life insurers will not be 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.
Federal Insurance Office (FIO)
Strongly supported by the ACLI, the bill creates for the first time a federal government office within Treasury with expertise in insurance to advise Congress and the administration on insurance-related issues and to help negotiate international regulatory equivalency agreements.
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 to the limits of the law. Although life insurers may be subject to assessments following a financial companies’ resolution under the new federal authority, it is unclear to what extent they will be affected by those assessments.
In addition, the new law makes clear that insurance company insolvencies will continue to be resolved under state law. The FDIC could only step in to wind down a systemically important insurance company if the insurance commissioner where the insurer is domiciled fails to take appropriate actions. We believe this scenario is highly unlikely.
Assessments
To offset the costs of this new law, the legislation includes a provision imposing risk-based assessments on large, interconnected financial companies, with such assessments deposited into a Financial Crisis Repayment Fund administered by the FDIC. Because the assessments are risk based, we believe that life insurers will have limited exposure.
Collins Amendment
To use a cliché, the Collins Amendment is an attempt to fit a square peg into a round hole. It would establish higher requirements for “Tier 1” capital for financial institutions that pose systemic risks. The amendment could apply to life insurers even though life insurers calculate risk-based capital much differently than banks. Risk-based capital rules are different for life insurers than for banks because life insurers address different types of risks.
This 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. As noted above in the section on the FIO, ACLI hopes that establishment of a Federal Insurance Office will provide members of Congress with advice on how rules intended for banks could have serious repercussions when applied to life insurers.
Consumer Financial Protection Agency
Life insurers’ products and market conduct are extensively regulated by the states. We’re pleased that the legislation largely excludes life insurance products from CFPA jurisdiction. We will closely monitor and, if necessary, participate in the rulemaking process to assure our products are not inadvertently affected.
Standard of Care
The SEC is directed to study the similarities and differences regarding regulation of broker-dealers and investment advisers when providing investment advice about securities, and to submit a report to Congress within six months of enactment. The SEC is authorized to address the standard of care through rulemaking, subject to the findings, conclusions and recommendations of the study.
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The American Council of Life Insurers (ACLI) is a Washington, D.C.-based trade association with more than 300 legal reserve life insurer and fraternal benefit society member companies operating in the United States. ACLI members represent more than 90 percent of the assets and premiums of the life insurance and annuity industry. In addition to life insurance and annuities, ACLI member companies offer pensions, 401(k) and other retirement plans, long-term care and disability income insurance, and reinsurance. ACLI's public Web site can be accessed at www.acli.com.