IMF Warns of U.S. Insurers’ Risky Behavior, Calls for Fed Regulator

U.S. insurance companies, hurt by the prolonged period of low interest rates, are taking on greater risks, the International Monetary Fund (IMF) said today in a report assessing the stability of the U.S. financial system.

The report was issued because the stability of the U.S. financial system remains a key for global stability, according to the document.

The IMF also called for an independent national insurance regulator, saying that is an “imperative” in order to address gaps with international standards (including weaknesses in valuation and solvency requirements) and to ensure consistency in regulation and supervision.

The IMF report said that the Financial Stability Oversight Council (FSOC) should be strengthened, “with member agencies being given an explicit financial stability mandate.”

FSOC’s role was the subject of a Senate Banking Committee hearing Wednesday. The American Council of Life Insurers and other witnesses testified that the FSOC pays too much attention to the international Financial Stability Board in determining whether insurance companies should be designated as systemically important financial institutions (SIFI).

ACLI CEO Dirk Kempthorne testified that insurers are being treated differently than other non-banks by FSOC and FSB.

“While FSB and FSOC have designated three U.S. insurers for heightened supervision and regulation, they are pursuing an ‘activities-based’ approach for asset managers rather than the imposition of heightened regulation on individual companies merely because of size,” Kempthorne said.

The IMF report sounded an alarm on the fragmentation of the U.S. insurance regulatory system, saying a national insurance regulator “is needed to deliver enhancements and greater regulatory and supervisory consistency.”

U.S. financial institutions constitute 22 percent of world global assets, the report said, and the insurance industry is important because the U.S. insurance market is the largest in the world with premium volume accounting for a third of the global market.

Specifically, the IMF report said, some life insurers have increased their securities-lending and cash collateral reinvestment activities, the report said. Some large life insurance groups in particular have been expanding nontraditional business, such as providing complex guarantees, and remain exposed to macroeconomic risks, the IMF said.

The “complex guarantees” issue probably relates to the trend by U.S. insurance companies, led by Prudential Financial, to reinsure the pension liabilities of companies throughout the world.

The report also voices concern with the consolidation of insurers in the United States, but this mainly deals with health and property casualty insurance, for example, the proposed acquisitions of Humana by Aetna and Chubb by ACE.

The Chubb/ACE deal is linked to the low interest rate environment because investment income by P/C companies has fallen significantly because of the substantive decline in long-term interest rates.

The IMF also notes with concern the decision of “many” firms to exit the market, and “a few firms failing.”

The report also said that in the searching for higher yields, some insurers have invested more in private equity, hedge funds, longer duration and lower credit corporate bonds, and real estate-related assets.

At the same time, the report said, the U.S. insurance supervision framework has been strengthened, primarily because state regulators — through the NAIC — have initiated solvency modernization and taken steps to strengthen group and international supervision.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].