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Leader's Edge Carrier Living Wills

So you think they are too big to fail? New rules should make you think again.

By  Scott Sinder and John Fielding

The Federal Reserve and the FDIC recently issued a proposed rule that could affect insurers considered “too big to fail.” The suggested provisions to the Dodd-Frank Act would require “non-bank financial companies” supervised by the Fed and bank holding companies with assets of $50 billion or more to create “resolution plans” for themselves (often referred to as “living wills”). The proposed rule requires that these living wills—along with periodic reports concerning credit exposures—be submitted to the Fed, the FDIC and the Financial Stability Oversight Council (FSOC).

The living will requirements apply to non-bank entities, including insurers and reinsurers, that are determined to be a systemic risk under the law. Although the proposed rule will be applicable only to systemically significant financial institutions subject to Fed oversight, the standards set by the rule are worth watching. That’s because the living will and credit reporting requirements could become industry norms for insurers and reinsurers—no matter the magnitude of risk presented by an individual institution.

The proposal would require financial companies to develop resolution plans to provide for their reorganization or liquidation “in a manner that substantially mitigates the risk that the failure of the company would have serious adverse effects on the financial stability in the United States.”

Each plan must include company background information, analytical support for the plan, and a mapping of funding, liquidity, support functions, and resources to the company’s material entities, core business lines, and critical operations.

Regulators will review resolution plans, and any failure to cure any deficiencies could lead to regulators imposing more stringent capital, leverage or liquidity requirements on the company, or restrictions on growth, activities or operations. Resolution plans would be submitted within 180 days of the effective date of final regulations or the date a company becomes regulated by the Fed. Annual updates would be required, as well as updates whenever a covered company undergoes a significant change, such as a merger.

The rule would also require quarterly credit exposure reports describing the nature and extent of the company’s exposures to significant bank holding companies and significant non-bank financial companies. They must also disclose their exposures to the covered company. The proposed rule specifies information that would be required, including credit exposures arising from loans, leases, funded lines of credit, deposits, money placements and repurchase agreements. The final rule is expected to be issued later this year.

The Act gives the FSOC authority to require a non-bank financial company to be supervised by the Fed. The company can also be subject to more stringent financial regulation if the oversight council determines the company could pose a threat to the financial stability of the United States.

The FSOC issued a proposed rule in January describing criteria for determining if a non-bank financial company (think insurer) should be designated as a systemically important entity subject to heightened regulatory standards.

As you might imagine, insurers and reinsurers have expressed concern over the details—or rather the lack thereof—in the proposed rule. They have noted, for example, that the rule does not take into consideration unique aspects of the insurance sector and insurance regulation.

Moreover, there has been significant grumbling across the spectrum—from industry, state regulators, and members of Congress (including Rep. Barney Frank, D-Mass.). They complain that the FSOC is drafting rules affecting the insurance industry when it is still missing two of its required three members with insurance expertise. Industry groups have asked the Obama administration to delay new rules until the other two council positions are filled.

To date, Missouri insurance director John Duff has been the only insurance representative on the 18-member oversight council. Duff, who was appointed through the NAIC, is a non-voting member. President Obama will appoint a voting insurance expert to the FSOC, although it’s not known when that appointment will be made. The third insurance position, and another non-voting member, will be the director of the new Federal Insurance Office, Michael McRaith, previously the director of the Illinois Department of Insurance and NAIC secretary-treasurer.

When he assumes his FIO post this month, McRaith will have to hit the ground running. The Federal Insurance Office is responsible for negotiating international insurance agreements and will likely take on a significant role for the U.S. in international insurance issues. It is also responsible for drafting and submitting to Congress by early next year a report on how best to modernize and improve insurance regulation. Both supporters and opponents of a greater federal role in insurance regulation claim McRaith’s expertise will be an asset in drafting a fair and ultimately useful final report.

Sinder, a partner at Steptoe & Johnson, is CIAB General Counsel.
Fielding is of counsel at Steptoe & Johnson.


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