Prudential Operations Chief: The Time for Federal Regulation Is ‘Clearly Here’
October 21, 2014 by Jeff Jeffrey
WASHINGTON – The 50-state approach to regulating life insurance has proven itself through the industry’s stability, but the time for federal regulation is “clearly here,” said Stephen Pelletier, executive vice president and chief operating officer of Prudential Financial’s U.S. businesses.
Speaking to an audience at the American Council of Life Insurers’ annual conference in Washington, D.C., Pelletier said the Federal Reserve Board is working to better understand its new role as a regulator of the insurance industry. “But a lot will have to be judged by the results,” Pelletier said.
Prudential Financial is one of three companies to be designated as systemically important financial institutions by the Financial Stability Oversight Council. MetLife Inc. is challenging the preliminary SIFI designation it received earlier this month. American International Group Inc. has accepted its SIFI designation.
“We find that the Federal Reserve and other federal regulators are very familiar with the banking business, but the insurance business is entirely new to them,” Pelletier said. “The good news is that they recognize that and are willing to engage in a very, very open dialogue with us about what some of the differences are. That’s an ongoing process for us.”
Pelletier said he thought the Fed’s decision to hire former Connecticut Insurance Commissioner Thomas Sullivan as its first senior adviser on insurance was “a big step forward” in the process of understanding the industry.
Peter Schaefer, president and chief executive officer of Hannover Life Reinsurance, said during the panel discussion that some of the regulations under consideration by the Fed could be an opportunity to wipe out barriers to trade between the United States and Europe, the world’s two largest insurance markets.
Schaefer pointed to the capital standards being drafted by the Fed as one example.
“If the U.S. and the EU can come together, you’re talking about 70%-plus of the insurance market,” Schaefer said. “Everyone benefits if we move forward and break down trade barriers around the world.”
The Fed announced on Oct. 1 that it has launched a quantitative impact study that will evaluate the potential effects of imposing new consolidated capital requirements on SIFIs. The study is designed to help the board construct a capital framework that takes into account the unique nature of the insurance business while also fulfilling the requirements of the Dodd-Frank Act (Best’s News Service, Oct. 1, 2014).
However, that effort has been complicated by questions of whether the Dodd-Frank Act gives the Fed the authority to distinguish between banks and insurance companies when setting capital standards. The insurance industry has warned applying the same capital standards to banks and insurers could cause severe disruptions in the marketplace because the two businesses are fundamentally different.
Congress is working on legislation that would clarify the Fed’s authority on setting capital standards.
Meanwhile, the International Association of Insurance Supervisors is working to have its own higher loss absorbency requirements for companies designated as globally systemically important insurers completed by the end of 2015. By 2016, the IAIS expects to start applying basic capital standards to G-SIIs.
Currently, there are nine companies set to be designated as G-SIIs, including U.S. insurers AIG, MetLife and Prudential Financial.
“If we can come together on an outcomes-based, rational capital standard, I think that’s a big step forward for the industry around the world,” Schaefer said.
Thomas McInerney, president and CEO of Genworth Financial, said in order to achieve that level of cooperation, the industry and regulators will have to adhere to the consensus-driven “Team U.S.A.” approach that has been described by the Fed’s Sullivan.
“We need to find a unified voice and to do a better job with European and Japanese regulators,” McInerney said. “There’s always going to be differences between different parts of the industry. But a unified voice would help us to have internationally a more level playing field that is not disruptive to what has historically worked pretty well in the U.S.”
Schaefer added while the upsides of reaching agreement on a capital standard that breaks down trade barriers are great, the potential downsides could cause major problems for the industry.
“As we saw with Basel II and Basel III, which trickled down to affect smaller insurers, these regulatory decisions can have a major impact,” Schaefer said. “That makes it all the more important that we get it right the first time.”
The panel also touched on other areas of opportunity for the insurance industry, which all three participants agreed would be driven by technology.
Pelletier said the life insurance sector has lagged behind health and property/casualty insurers in adopting technologies that make it easier for consumers to find products that meet their needs.
“The property/casualty sector in particular has gotten out ahead of the industry when it comes to technology that enhances the customer experience,” Pelletier said. “We need to be adopting these technologies sooner than later.”
McInerney said part of the problem has been that many life insurance products are “way too complicated,” which makes it difficult for consumers to know that the product they buy will meet their needs.
“I understand that some of these products need to be complicated and that state regulators need to have all the details to ensure consumers are being protected,” McInerney said. “But we need to make the products more simple for the consumer.”
