Since the financial and economic crises, global stability remains at the top of political and regulatory agendas. New regulatory measures are being considered by individual countries and collectively through international bodies including the G-20 and the Financial Stability Board (FSB). In the U.S. the groundwork for designating systemically important financial institutions (SIFIs) and global-SIFIs (G-SIFIs) is well underway. The FSB and the International Association of Insurance Supervisors’ (IAIS) have been exploring the option of extending the G-SIFI controls to global systemically important insurers (G-SIIs). It is speculated that the first G-SIIs may be named as early as April, with annual designations thereafter expected each November, according to the IAIS timeline. Those insurers designated as a G-SII will be subject to consolidated group-wide supervision (a regulator with direct authority over group entities, including parents and affiliates); effective resolution (similar to Dodd-Frank’s SIFI “living wills” plus a requirement to adopt institution-specific cross-border cooperation agreements); and higher loss absorbency. Since, in the U.S., insurance is regulated by the states and not a single regulator, it may have to revise its existing regulations to create a single consolidated group supervisor for G-SIIs to comply. At the very least, the G-SII designations will create a great deal of regulatory uncertainty for insurers.
Related, the Geneva Association recently conducted a benchmarking study comparing the 28 named Globally Systemically Important Banks (G-SIBs) and 28 of the largest global insurers and is the first to do a quantitative comparison of insurers to banks. The purpose of the study is to provide policymakers and other stakeholders with a factual analysis that quantified the systemic risk of banks versus insurers using comparable criteria required by the IAIS data calls. The study applied 17 indicators including asset size, amount of CDS written, usage of short-term funding, and gross derivative exposure to compare the insurers and banks. The data showed that insurers are significantly smaller/lower than banks in most of the 17 indicators. It noted that insurers generally match assets with liabilities and are thus less exposed than banks to the systemic risk of maturity transformation and carry substantially lower positions in derivatives. It also found insurers to be less interconnected than banks and that the failure of an insurer has a significantly lower impact to the financial industry than the failure of a bank. The Geneva Association is an international insurance “think tank” for strategically important insurance and risk management issues.
On January 15, the Financial Stability Oversight Committee (FSOC) announced that it is extending the comment period from January 18 to February 15, 2013. It was granted in order to allow the public more time to review the proposed recommendations and the SEC staff report issued November 30, 2012. In August, former SEC Chairman Mary Shapiro released a statement that three of the five SEC Commissioners had indicated that they would not support the staff proposal to reform the structure of money market funds. Therefore the proposal was not submitted for a Commissioner vote and could not be published for public comment. In November, the FSOC published proposed recommendations that the SEC proceed with structural reforms of money market funds. Like the SEC staff proposal, the FSOC recommends either floating the NAV and using mark-to-market valuation or implementing capital buffers. Under Dodd-Frank § 120, the FSOC can issue recommendations to financial regulatory agencies to apply new or heightened standards and safeguards for a financial activity or practice. The SEC would be required to either adopt the recommended standards or explain in writing to the FSOC why it failed to act.
On January 24, President Obama announced Mary Jo White as his nominee to head the SEC. White was the chief federal prosecutor for the Southern District of New York for nine years. She left the post in 2002 and has been in private practice as a partner at the law firm Debevoise and Plimpton. Despite White’s notable career as a prosecutor (including prosecuting John Gotti and the 1993 World Trade Center bombers), some suspect that White will come under criticism for her more recent private-sector defense of “Wall Street titans.” If confirmed, White will replace Elisse Walter, who has served as Acting Chairman since Mary Schapiro resigned in December.
On January 15, the Financial Accounting Standards Board (FASB) issued a proposal to improve financial reporting for repurchase agreements and other transfers with forward agreement to repurchase transferred assets. Proposed Accounting Standards Update, Transfers and Servicing (Topic 860) would clarify the guidance for distinguishing these transactions as either sales or secured borrowings and improve disclosures about them. The proposal would eliminate the distinction between agreements that settle before the maturity of the transferred asset and those that settle at the same time as the transferred asset matures. In either case if there is a transfer with a forward agreement to repurchase the transferred assets or “substantially-the-same” assets at a fixed price, then the transferor has “effective control” over the transferred assets and the transfer would be accounted for as secured borrowings. When the transferor does not have effective control, the transaction would be required to be assessed under the remaining derecognition conditions in U.S. GAAP in order to determine whether it should be accounted for as secured borrowing or a sale with a forward repurchase agreement. The comment period ends on March 29, 2013.
On January 23, a status update was filed stating that the parties had agreed to settlement terms after a private mediation held on January 18th. The resolution is subject to court certification of a settlement class and approval of the settlement. The plaintiffs are seeking money damages for American Greetings allegedly using the personal and private information (e.g., social security number, age, etc.) of its employees to secure COLI policies without the employees’ permission or consent. If approved by the court, the settlement would resolve both Baker and Collier v. American Greetings. We will continue tracking and will report any disclosed settlement terms.
Case numbers: Baker v. American Greetings Corp., No. 1:12-cv-00065 (N.D. Ohio); Collier v. American Greetings Corp., No. 1:12-cv-1760 (N.D. Ohio.)
On January 22, the National Association of Insurance Commissioners announced that former Nebraska Senator Ben Nelson has been named their CEO. Nelson’s responsibilities will include outreach to federal and international governmental entities, as well as state government associations, consumers and insurance industry representatives. Prior to retiring from the Senate in 2012 after two terms, Nelson served as Governor of Nebraska from 1990-1998 and has done stints at the NAIC (1982-1985) and the Nebraska Department of Insurance (1975-1976). Nelson replaces NAIC Acting CEO Andrew Beal, who stepped into the role after former CEO Therese Vaughan left the association in November.