Congress Considers Additional Refinements to Dodd-Frank, Addressing Duplicative Regulation of Insurers and Thrift Holding Companies

On March 7, 2018, the Housing and Insurance Subcommittee of the U.S. House of Representatives Committee on Financial Services heard testimony on the issue of duplicative regulation of insurers that are also savings and loan holding companies.

The testimony, provided by insurance industry officials and a legal expert, addressed the proposed State Insurance Regulation Preservation Act (H.R. 5059, SIRPA), which was introduced last month by Representatives Keith Rothfus (R-Pa.) and Joyce Beatty (D-Ohio). SIRPA would limit federal regulators’ ability to oversee thrift holding companies that are state-regulated insurers.

This would essentially cede major aspects of group regulation of these entities to state regulators and their umbrella organization, the National Association of Insurance Commissioners (the NAIC). In recent years, the NAIC has been advancing efforts on group capital standards, which would become even more relevant with the passage of SIRPA.

The legislation is the latest effort to refine financial regulation, which was overhauled by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, in order to distinguish between insurers and other types of financial firms. The perceived use of “bank-centric” standards for regulating insurers has been a major issue since the passage of Dodd-Frank, as exemplified by the 2014 passage of legislation clarifying the “Collins Amendment” (Section 171 of Dodd-Frank). Such provision had authorized the Board of Governors of the Federal Reserve System (the BOG) to apply consolidated capital and leverage requirements to financial firms, without distinguishing between banking and nonbanking aspects of the consolidated firms' business. The 2014 legislation clarified that the BOG could tailor such efforts to take into account the presence of an insurer in the consolidated group. For insurers owning thrifts, this measure was a welcome recognition that insurers have a different business model from thrifts and that state insurance regulators have primary responsibility for regulating insurance company solvency. For the NAIC and state regulators, the “Collins fix” represented vindication of their position that state insurance regulation is more effective than a broader, federal, bank-centric framework would be for these entities.

In a similar vein, SIRPA defines a new term, “insurance savings and loan holding company” (ISLHC), as one of the following:

1. A top-tier savings and loan holding company that is an insurance company
2. A savings and loan holding company that, during the four most recent consecutive quarters, held 75 percent or more of its total consolidated assets in one or more insurers, other than assets associated with insurance for credit risk
3. A top-tier savings and loan holding company that:
   1. Was registered as a savings and loan holding company before July 21, 2010 (the date that Dodd-Frank was signed), and
   2. Is a New York not-for-profit corporation formed for the purpose of holding the stock of a New York insurance company

Under the Home Owners’ Loan Act (HOLA), which regulates savings and loan holding companies, such a holding company must promptly provide to the BOG upon request certain informational reports and other supervisory materials such as audited financials.  SIRPA would amend this requirement to provide that, in the case of an ISLHC, the BOG’s request for such information must be channeled through the “applicable state or Federal regulatory authority”.

An ISLHC would not be required to file reports other than those relating to:

1. Organizational structure
2. Transactions between the ISLHC and its affiliates
3. Balance sheet and income statements of a material subsidiary of the company
4. Capital holdings in relation to applicable minimum capital standards

In this context, "material subsidiary" means a subsidiary that meets one of these three criteria:

1. Off-balance sheet activities if not less than $5 billion
2. Equity capital not less than 5 percent of the consolidated equity capital of the top-tier holding company
3. Consolidated operating revenue of not less than 5 percent of the consolidated operating revenue of the top-tier holding company

However, "material subsidiary" does not include any functionally regulated subsidiary; nonoperating shell holding company; or company primarily engaged in internal treasury, investment or employee benefits activities.

Under the proposed legislation, the BOG may neither examine nor apply supervisory guidance to an ISLHC or any subsidiary of an ISLHC (other than a material subsidiary) as long as such company meets applicable state insurance capital standards and any minimum capital standards for an ISLHC promulgated by the BOG under the Collins Amendment.

BOG examinations of, and supervisory guidance applicable to, an ISLHC would be required to be based upon a “supervisory framework” that is “(I) tailored to the risks and activities of the business of insurance” and ‘‘(II) developed in consultation with state insurance authorities to ensure that such framework does not duplicate or conflict with state insurance requirements.” In issuing any regulation, order or supervisory guidance applicable to an ISLHC, the BOG would be required to tailor such regulation to the risks and activities of the business of insurance and to consult with state insurance authorities to avoid duplication.  In addition, the legislation exempts ISLHCs from requirements to maintain books and records as directed by the BOG.

Under certain circumstances involving risk to an institution’s “safety and soundness,” the BOG would be permitted to suspend these new provisions of HOLA, and the BOG retains authority to impose capital requirements as set forth in the Collins Amendment.

Insurers, particularly those owning thrifts, should be watching this bill closely, as they continue to navigate shifting regulatory waters. In addition, attention seems likely to intensify on the NAIC’s efforts on group capital and group solvency should states become even more prominent in the regulation of these entities.