President Obama signed the Insurance Capital Standards Clarification Act of 2014 into law on December 18, 2014. The House previously passed S. 2270 (Collins/Brown/Johanns) on December 10 by unanimous consent. The Senate passed S. 2270 on June 6 also by unanimous consent.
ACLI Public Policy Issue Brief—Federal Capital Standards (PDF).
Through authority provided in the Dodd-Frank Act, the Federal Reserve Board (Fed) regulates at the holding company level a number of companies that are primarily life insurers. The Dodd-Frank Act granted the Federal Reserve Board new supervisory authority over Savings & Loan Holding Companies (SLHCs), many of which are, or own, life insurers. The Dodd-Frank Act also authorized the Fed to supervise nonbank financial companies, which may include insurance companies, that are designated systemically important by the Financial Stability Oversight Council.
In July 2013 the Federal Reserve Board issued a final rule implementing new capital standards for financial services companies. Known as Basel III, these new standards are bank-based capital rules that favor short-term assets and include only a temporary exemption for insurers that are or are owned by SLHCs. However, as a result of section 171 of the Dodd-Frank Act (the Collins Amendment), it remains unclear how or if the Fed will apply Basel III to those insurers, or to insurers that are designated systemically important.
Life insurers are greatly concerned that the Fed may ultimately apply bank-centric standards and methodologies to insurance companies. Life insurance companies have a need for long-term assets that match long-term, guaranteed life insurance and annuity products. Insurance risk-based capital (RBC) requirements are therefore the appropriate standards to apply to an insurance company.
- Insurance-specific risk-based capital standards are the right standards for capital regulation for insurers that offer retirement and financial security products with long-term guarantees that protect 75 million American families.
- Capital standards appropriate for banks are not appropriate for life insurers. The risk profiles, balance sheet characteristics, and business models of banks and insurance companies are vastly different.
- If life insurers are required to hold excessive amounts of short-term assets by bank-based capital rules, the availability and affordability of financial security products could be affected.
- The Federal Reserve rulemaking is the first attempt by the federal government to set capital standards to the state-regulated insurance industry.
- State insurance regulators already enforce strict capital standards at the state level to protect consumers and ensure claims are paid quickly and efficiently.
- Life insurers pay out $1.7 billion to families and businesses every day.
- Our products are needed now more than ever—every day for the next 13 years, some 10,000 baby boomers will reach age 65 and need a source of long-term income to supplement Social Security.
ACLI strongly supported S. 2270 and applauds Congress and President Obama for making the Act law in 2014.
ACLI looks forward to working with the Federal Reserve as it develops appropriate capital standards for insurance companies. Misapplication of bank-based standards would disrupt the insurance business model and the industry’s ability to provide long-term, guaranteed retirement products and financial protection to customers.