MetLife filed a lawsuit Tuesday challenging its designation as a systemically important financial institution (SIFI) by the Financial Stability Oversight Council. The largest U.S. life insurer said it doesn’t deserve the systemic-risk label because its failure wouldn’t threaten the financial system.

Metlife logo

Regulatory cloud looms over SIFI insurance companies

The legal challenge from MetLife will be the first test of the FSOC’s power. The FSOC was created out of the 2010 Dodd-Frank financial reform legislation and includes Treasury Secretary Jack Lew, Federal Reserve Chair Janet Yellen and Securities and Exchange Commission head Mary Jo White among its members.

Currently, SIFI insurance companies have a regulatory cloud looming over them, as the Dodd-Frank Act gives the Fed the authority to make them adhere to the same regulatory capital rules banks have to follow. However, the Fed doesn’t currently have the flexibility to adapt those rules to insurance companies’ different business model.

As reported by ValueWalk last October, the Fed had begun a Quantitative Impact Survey (QIS) to study the impact its regulatory capital framework would have on non-bank SIFIs such as Prudential Financial Inc., MetLife Inc., and American International Group Inc., a move that is viewed as a positive sign for how those firms will be treated.

Only option left for MetLife

The FSOC has already deemed AIG, GE Capital and Prudential Financial as systemic risks, and they are now overseen by the Fed. Though only Prudential appealed the FSOC’s decision, it declined to pursue a legal challenge. MetLife’s lawsuit was the only option left for the insurer to oppose the FSOC’s classification after it lost its appeal last year.

Gina Chon and Barney Jopson of the Financial Times point out that it’s a risk for companies designated as a SIFI to legally challenge the FSOC, as it could anger a future regulator. However, MetLife has been more aggressive in its tone in opposing the SIFI label, arguing that it would put the insurer on an uneven playing field with its competitors and is not warranted.

In December, U.S. lawmakers voted to give the Fed more flexibility on how it tailors the rules after insurers said they shouldn’t be subject to standards designed for banks. MetLife has said that the FSOC should focus on activities that pose systemic risks rather than on individual companies. The life insurer has said that its life insurance products don’t pose a threat.

Steven Kandarian, chairman, president and CEO of MetLife, said: “It is not enough to designate companies as SIFIs merely because they are big. The Dodd-Frank Act is clear that size alone does not make a company systemic.”