Carrier Living Wills
So you think they are too big to
fail? New rules should make you think again.
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
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
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
Fielding is of counsel at Steptoe & Johnson.