Sterne Agee analyst John M. Nadel goes over Senator Collins’ comments in a recent meeting, arguing that if passed, Collins’ amendment would be “a clear positive for systemic insurers.”

Senator Collins

During a Senate Banking subcommittee meeting today focused on “Finding the Right Capital Regulations for Insurers,” Senator Collins specifically indicated that her prior legislation known as the “Collins Amendment” was not specifically intended to prevent the Federal Reserve from tailoring rules to develop proper capital standards for non-bank systemically important financial institutions (SIFI’s). This is a clear positive development, in our view.

Subcommittee Meeting: Senator Collins

Senator Collins indicated she believes the Federal Reserve is able to, and should, take into account the differences between insurers and banks in developing an appropriate framework for measuring capital standards of insurers. Moreover, Senator Collins announced she has introduced legislation that will make it clear that such differences can and should be accounted for in tailoring rules for insurers.

Why is this Important?

Key regulators including Federal Reserve Chairwoman Yellen have made it clear they recognize there are key differences between the business models of insurance companies and banks, and such differences should be taken into account in setting the standards for regulating SIFI insurers. However, despite such commentary, these same regulators have consistently further indicated that the so-called Collins Amendment (Section 171 of Dodd/Frank) could be viewed as a limiting factor in significantly altering the capital framework currently used for banks when developing the framework for insurers. As such, investors and insurance industry participants have rightfully been concerned that the rules, when ultimately developed, may not differ substantially enough to truly measure risk appropriately for insurers. Senator Collins, in our opinion, made it abundantly clear today in her testimony that her original legislation was never intended to supplant current state-based insurance regulatory with a bank-centric capital regime. Senator Collins indicated that Federal Reserve officials have repeatedly suggested that the Fed lacks the authority to take key differences between banks and insurers into account when implementing Section 171 of Dodd/Frank. However, Senator Collins, the author of Section 171, indicated she does not agree that Section 171 limits the Fed’s authority to tailor the rules. In order to clarify her views, Senator Collins introduced legislation which would amend Section 171 of Dodd/Frank (Senate Bill 2102) to clarify that in establishing minimum capital requirements for holding companies on a consolidated basis, the Federal Reserve is not required to include insurers so long as the insurers are engaged in activities regulated as insurance at the state level. Further, the legislation provides a mechanism for the Federal Reserve, acting in consultation with the appropriate state insurance authority, to provide similar treatment for foreign insurance entities within a U.S. holding company where that entity itself does not do business in the U.S.

Our View

To the extent that Senator Collins’ proposed amendment (Senate Bill 2102), or something similar to it, is enacted into legislation, we believe this would be a clear positive for systemic insurers as it would completely clarify that the Federal Reserve does indeed have full authority to tailor the capital framework that will ultimately be applicable to SIFI insurers. Of course, as always, we acknowledge that the devil will ultimately be in the details of the ultimate framework which, in our view, is unlikely to be proposed until 2015.