Under the Dodd-Frank Act, all but the very largest US
life insurers appear likely to be subject to additional regulation
by the Federal Reserve Board. But this could change at the whim of
newly-created bodies, the Financial Stability Oversight Council and
Federal Insurance Office. Charles Davis reports.


US insurance companies breathed an initial sigh of relief after
escaping the regulatory crosshairs of the new Consumer Financial
Protection Bureau (CFPB). However, the industry may not escape
entirely from greater compliance burdens as the Dodd-Frank Act
continues to produce new regulations.

Banks selling insurance and debt
protection products likely could face heightened scrutiny, as the
act gave the new bureau the power to review whether banks are doing
an adequate job of disclosing terms to customers of nearly all
financial services products of institutions with total assets over

While this excludes all but the
largest insurers, the ways in which the CFPB decides to review
disclosures of large institutions could work its way down the
regulatory food chain to all banks that provide life insurance,
credit insurance and debt protection services

Many Dodd-Frank Act provisions call
for studies that could result in new rules, so the long-term impact
is unknown.

Regulatory developments set in
motion by the act are only now starting, but it’s clear that
several potential effects on life insurance are emerging.

But the insurance industry can
claim some initial victories in what was excluded from the act. The
most significant was that neither Congressional leaders nor Obama
administration officials chose to take on the fight of proposing
federal regulation of insurance.

The act leaves the current regime
of state regulation in place, and, in one important battle, drew an
even stronger line in the sand by rebuffing the Security and
Exchange Commission’s (SEC) attempt to gain jurisdiction over
indexed products.



The drama is far from over, though,
as the act did create the new Federal Insurance Office, which is
charged with the task of studying potential federal regulation of
insurance and is seen in some quarters as a back-door route for
federal regulation of insurance.

The act also rather ominously
grants potential regulatory authority to federal banking regulators
and the newly created Financial Stability Oversight Council over
large non-bank institutions.

It authorises the council to
determine that “material distress” at a non-bank financial company
or the nature or operations of the company could pose a threat to
US financial stability, and to determine if the Board of Governors
of the Federal Reserve System (Fed) should supervise the

If the council designated an
insurer’s parent holding company as a “significant non-bank”, that
company would be required to register and file reports with the Fed
and be subject to heightened prudential standards including capital
and liquidity requirements.

In addition to other duties, the
council is charged with monitoring domestic and international
financial regulatory proposals, including insurance and accounting
issues. The council is charged with advising Congress and making
recommendations in areas that will enhance the stability of the
financial markets. The act specifically listed insurance as one of
the areas for which the council is to monitor and provide

Insurers, bank insurance units and
brokerage firms also are closing watching implementation of the
Volcker Rule, a provision in the act designed to prevent
proprietary trading by restricting sponsorship and investment in
hedge funds and private equity funds by what the law calls ‘banking

Banking entities are broadly
defined to include non-bank companies with an affiliated insured
bank or savings association. This means that if an insurer owns an
insured depository institution, the Volcker Rule’s prohibitions
could apply to the entire complex.


Some success

Insurers successfully sought an
exception allowing insurance companies to conduct proprietary
trading for their general accounts, but for insurers that own an
insured depository institution, the Volcker Rule could have a huge
impact on hedge fund and private equity fund formation and

Perhaps the largest unanswered
question posed by the act is the potential fiduciary duty of
broker-dealers. The SEC is directed by the law to consider rules to
impose a fiduciary duty standard on broker-dealers with the goal of
harmonising standards of care owed by broker-dealers and investment
advisers for investment advice to retail customers.

Harmonisation generated tremendous
controversy during the legislative process that gave rise to the
act, with insurance industry advocates strongly opposed to adoption
of a fiduciary duty standard for broker-dealers.

Insurance industry representatives
continue to work on clarifying provisions of the act. Several
insurers testified in support of amendments to Dodd-Frank in
November, aiming to reduce bureaucratic burdens inadvertently
created when the law was enacted.

Members of the House Financial
Services Subcommittee are weighing changes to Dodd-Frank that would
streamline the Federal Insurance Office’s subpoena process, add
more confidentiality protections for data collected by those
subpoenas and an insurance company exemption for subpoenas
originating from the Office of Financial Research.

Appearing before the subcommittee,
insurance regulators affirmed their willingness to participate in
the implementation of the Dodd-Frank Act, but stressed that
industry bore no responsibility for excesses in other financial
services industries that gave rise to the law.

Joseph Torti, deputy director and
superintendent of insurance and banking at the Rhode Island
Department of Business Regulation, testified on behalf of the
National Association of Insurance Commissioners. Torti said the
association has not taken an official stance on Dodd-Frank, but is
a willing partner in its implementation.

The NAIC, Torti said, “strongly
believes the implementation of Dodd-Frank by the federal agencies
or any legislative efforts to amend it should be consistent with
Dodd-Frank’s recognition of the uniqueness of the insurer business
model and the strength of the national state-based system of
insurance regulation”.

The civil tone of the hearing belies the contentiousness between
federal regulators and insurers, who see no reason to lump the
industry in with other, riskier sectors of the financial services
industry. The coming months and years will provide a steady stream
of regulatory battles as Dodd-Frank slowly takes shape.