FSOC: Regulators Making Progress Toward Financial Stability; Dangers Loom
June 23, 2016 by Frank Klimko
WASHINGTON – Regulators have made significant progress in improving financial resiliency and reducing economically risky business practices that led to the U.S. financial meltdown eight years ago, according to a new report by the Financial Stability Oversight Council.
“Financial regulatory reforms and a strengthening of market discipline since the global financial crisis have made the U.S. financial system more resilient, as vulnerabilities remained moderate,” the report said.
Despite the gains, dangers still exist and federal regulators, their state counterparts, and financial services companies must remain vigilant, according to the FSOC’s 2016 Annual Report. The council — made up of the country’s top federal financial system regulators — unanimously approved the report June 21.
“U.S. markets and financial institutions are constantly evolving,” Treasury Secretary Jacob Lew said at the meeting, “and we must remain alert and responsive to new challenges in order to maintain the safety, soundness and resiliency of our financial system.”
Much of the report focused on the potential risks generated by the banking sector of the financial system, referencing the insurance industry in just a few sections.
That bank-centric focus is probably appropriate for the FSOC in general, Adam Kerns, American Insurance Association assistant general counsel, told Best’s News Service
“I generally think it’s focused mostly on the banking sector,” Kerns said. “That reinforces our point that the insurance industry is inherently not risky.”
“We are not a source of systemic risk,” Kerns said. “Insurance companies provide stability in the market.”
Jimi Grande, senior vice president of federal and political affairs, National Association of Mutual Insurance Companies, agreed.
“The FSOC’s annual report is focused almost entirely on other aspects of the financial services industry, further supporting NAMIC’s message since the writing of the Dodd-Frank act that insurance, particularly traditional property/casualty insurance, simply does not pose a systemic risk to the economy,” Grande said.
The report did note the insurance sector continues to struggle with the low-yield environment, which has led some carriers into lower credit quality asset investments and less-liquid portfolios that could pose threats to their financial strength.
The FSOC made a similar warning in the 2015 annual report, which warned against insurers taking on incremental risk by extending the durations of their portfolios (Best’s News Service, June 12, 2015).
FSOC issued the same warning with additional urgency this year, noting global long-term interest rates have continued to fall. The FSOC’s annual reports are designed to set priorities for the next year and assess the current state of the financial industry, including the insurance market.
In general, the insurance industry suffered some headwinds last year, according to the report. Profitability, as measured by net income in 2015, was $58.3 billion in the property/casualty sector and $40.2 billion in the life insurance sector, resulting in total industry profits of $98.5 billion, the report said. Overall profitability dropped by 4.37% from 2014 ($103 billion) with the P/C sector experiencing a loss of 10.3% from the 2014 level of $65 billion. Conversely, life insurers notched a 5.79% hike from the 2014 level of $38 billion.
The property/casualty losses were largely driven by incurred losses that overwhelmed the premium growth the sector recorded last year, the report said. Life insurers reported a slight decrease in premiums, but lower reserve increases last year provided for the hike in net profits, the report said.
Despite last year’s results, the P/C sector remains healthy, Dave Snyder, Property Casualty Insurers Association of America vice president, international policy, told Best’s News Service.
“The (P/C) industry is financially strong and competitive in a regulatory system that puts a high premium on consumer protections,” Snyder said. “It achieves, generally speaking, a very effective and beneficial balance.”
Snyder noted the report did not recommend additional insurance regulations.
“There is nothing in the report to suggest that we need any dramatic change or that we need more regulation,” Snyder said. “It identified a number of issues that companies are aware of and working with regulators.”
The report also addressed the council’s biggest setback so far, the federal court ruling that rescinded the systemically important financial institution designation for MetLife Inc. The government has appealed to overturn the ruling (Best’s News Service, June 17, 2016).
The council continues to vigorously evaluate potential SIFI candidates and has not slowed down in the aftermath of the court ruling, FSOC officials said at a background briefing prior to the release of the document. Since its inception, the council has designated four nonbanks as SIFIs and has rejected the designation for five others. FSOC officials would not say if any nonbanks were in the SIFI pipeline or if the council was re-evaluating its SIFI exit ramp.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
