Captives predicted to be excluded from SIFIs

Vicky Beckett 09/11/2011

Most captives will be eliminated from government definitions of systemically important financial institutions (SIFIs), it is predicted.

The financial stability oversight council (FSOC) was created under the Dodd Frank Act to identify potential threats to the financial system.

The council recommended rules for SIFIs last October 25, which was discussed at last weekend’s NAIC national fall meeting.

The definitions of SIFIs could indicate future capital positions and operating profiles of select US insurers.

Peter Kranz, senior vice-president of Beecher Carlson Insurance Services, said: “What non-bank financial entities would fall under the FSOC's purview is an area I have had great concern about.

“Since the Dodd-Frank Act didn't initially provide specific quantitive parameters to determine which entities would be within the scope of the FSOC, the potential for this affecting the captive industry was very real.”

He noted however, the FSOC recently released proposed determination guidelines as they appear to put up an asset threshold of $50 bn which should eliminate virtually all, if not every, captive insurance company from consideration.

Additionally, were the asset parameter to be lowered or removed, and the remaining thresholds applied, the vast majority of captive insurance companies would be well inside the ratio requirements outlined in the proposed guidelines.

Kranz added: “That being said, the simple fact the federal government is stepping into the realm of state insurance regulation, one must continue to be concerned if it will stop there.

“The potential risk of further federal oversight will continue to exist and the industry must be vigilant in monitoring the actions of FSOC in an effort to mitigate any "scope creep" by the Council.”

Ernie Csiszar, former South Carolina insurance head and current president and vice-president of Patriot National Insurance Group, said: “The rules, though revised, aren't very helpful with the specifics of identifying which particular companies might qualify and which might not.”

However, he believes regulators are more likely to be overly-inclusive and overly-intrusive.

He said the recent bankruptcy of broker firm, MF Global, will encourage regulators to be increasingly intrusive.

This is because the first test of the securities and exchange commission and the commodity futures trading commission in the new Dodd-Frank environment have failed in this case.

“There is no doubt in my mind,” said Csiszar, “that some of the larger life companies are going to get caught up in the systemic part, not least because they intersect with derivatives and are frequent swaps and CDF (credit default swaps) counterparties.”

Csiszar is unsure if property and casualty (P/C) companies would be included but said: “If there is another AIG out there, then for sure. Perhaps also, there might be another AFLAC sitting on European sovereign bonds. If that is the case, well, you know they'll be included.

“Let's not forget either that the IAIS and the EU have a similar effort to identity globally active companies, and that designation could bring as much misery to the P/C and the reinsurance industries as the FSOC's adventures.”

Tags: Captive, Csiszar, Federal governement, Financial stability oversight council, Fsoc, Insurance, NAIC, Peter kranz, Property & casualty, SIFIs, Systematically important financial institutions

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Captives predicted to be excluded from SIFIs

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Cornelia 09/12/2011 5:02am

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