Bills
| 3.23.22

Should States be the Primary Regulators of Insurance Savings & Loan Holding Companies? (H.R. 5059)

Do you support or oppose this bill?

What is H.R. 5059?

(Updated October 9, 2018)

This bill — the State Insurance Regulation Preservation Act (SIRPA) — would limit the Federal Reserve’s (aka the Fed) ability to oversee thrift holding companies that are state-regulated insurers. It would define a new group of financial services entities, “insurance savings and loan holding companies” (ISLHCs), which are currently subject to both state and Fed regulation under the Dodd-Frank Act, and make them subject only to day-to-day state regulations. State regulators and their umbrella organization, the National Association of Insurance Commissioners (NAIC), would be the primary ISLHC regulator. The Fed would remain able to take a more active role if ISLHCs fail to adhere to regulatory requirements.

ISHLCs would be defined as one of the following:

  • A top-tier savings and loan holding company that is an insurance company;

  • A savings and loan holding company that, during the four most recent consecutive quarters, held 75% or more of its consolidated assets in one or more insurers, other than asserts associated with insurance for credit risk; or

  • A top-tier savings and loan holding company that was registered as a savings and loan holding company before July 21, 2010 (the date Dodd-Frank was signed) and is a New York not-for-profit corporation formed for the purpose of holding the stock of a New York insurance company.

This bill would also amend the Home Owners’ Loan Act (HOLA), which currently requires savings and loan holding companies to promptly provide the Fed’s Board of Governors (BOG)  with reports and other supervisory materials like audited financials, upon request. Under this bill, this requirement would be amended so that, in the case of an ISLHC, the BOG’s request for information must be channeled through the “applicable state or Federal regulatory authority.”

This bill would also reduce ISLHCs’ reporting requirements by reducing their required reporting related to:

  • Organizational structure;

  • Transactions between the ISLHC and its affiliates;

  • Balances sheet and income statements of a material subsidiary of the company; and

  • Capital holdings in relation to applicable minimum capital standards.

A “material subsidiary” would be defined as a subsidiary that meets one of the following criteria:

  • Off-balance sheet activities if not less than $5 billion;

  • Equity capital exceeding 5% of the consolidated equity capital of the top-tier holding company; or

  • Consolidated operating revenue exceeding 5% of the consolidated operating revenue of the top-tier holding company.

Functionally regulated subsidiaries, nonoperating shell holding companies, and companies primarily engaged in internal treasury, investment, or employee benefits activities wouldn’t be defined as “material subsidiaries.”

Examination and application of supervisory guidance by the BOG to ISLHCs or ISLHC subsidiaries would be prohibited as long as such companies meet applicable state insurance capital standards and any federal-level minimum capital standards for an ISLHC promulgated by the BOG.

BOG examinations of, and supervisory guidance applicable to, an ISLHC would be required to be based on a “supervisory framework” that is: 1) tailored to the risks and activities of the insurance business, and 2) developed in consultation with state insurance authorities to ensure that the framework is neither duplicative nor in conflict with state requirements. When issuing regulations, orders, or supervisory guidance applicable to an ISLHC, the BOG would be required to use the same supervisory framework. Additionally, ISLHCs are exempted from the requirement to maintain books and records as for the BOG.

Under certain circumstances when an institution’s “safety and soundness” are in question, the BOG would be permitted to suspend these new regulations. The BOG also retains the authority to impose capital requirements under the Collins Amendment.


Argument in favor

Current regulations are overly burdensome to insurers that are also savings and loan holding companies, and this bill would clarify that states are their primary regulator. The new regulatory structure could lead to better supervision, with state-level regulators fully assuming responsibilities that’d been shared with federal regulators in a more efficient, less duplicative way.

Argument opposed

State regulators aren’t equipped to deal with all aspects of insurance regulations, especially given that each state’s jurisdiction ends at state lines and many insurers operate nationwide. Additionally, whether federal regulation of insurance companies is burdensome is still open for debate — and if it isn’t then there’s no need to eliminate it as a layer of protection for consumers.

Impact

Insurance savings and loan holding companies; thrifts; state regulators; Federal Reserve; and the Office of the Comptroller of the Currency.

Cost of H.R. 5059

A CBO cost estimate for this bill is unavailable.

Additional Info

In-Depth: Rep. Keith Rothfus (R-PA) introduced this bill to ensure that insurance savings and loan holding companies ISLHCs that meet applicable state and federal capital standards are regulated by the states, rather than both states and the federal government:

“This common sense regulatory reform bill will ensure that federal and state regulators complement each other’s efforts. The current system of duplicative supervision is inefficient and creates added and unnecessary costs that hinder growth and hurt consumers.”

Professor Daniel Schwarcz, a professor at the University of Minnesota Law School and a prominent consumer advocate in the insurance space, testified to the House of Representatives Subcommittee on Housing and Insurance to oppose this bill. Professor Schwarcz argued that this legislation would undermine American taxpayers’ interests and increase the prospect of future financial instability:

“First, I will suggest that [this legislation] violates the core principle that the owners of federally-insured banks must be subject to effective consolidated oversight at the federal level. If a financial conglomerate chooses to benefit from the unique privileges that come along with owning a federally-insured depository institution, then it must be subject to umbrella supervision at the federal level to ensure that this privilege is not exploited. Second, [I] will emphasize [this legislation] is premised on the flawed assumption that state insurance regulators’ supervision of financial conglomerates is effective and time-tested. In fact, deficiencies in state insurance regulators’ group level supervision helped contribute to the 2008 crisis. And though state insurance regulators have indeed made important improvements in their umbrella oversight of insurance groups, these recent reforms remain largely untested and importantly limited. Third, I will show how [this legislation] creates the prospect for exactly the same type of regulatory arbitrage that helped cause the 2008 financial crisis. For instance, as currently drafted, [this legislation] would allow any large bank or thrift holding company to completely avoid federal oversight simply by causing its top tier holding company to acquire a license from a single state to sell insurance. Finally, I will suggest that [this] is legislation in search of a problem. In particular, I have seen limited evidence that the Federal Reserve’s supervision of insurance-focused Savings and Loan Holding Companies (“SLHC”s) interferes with traditional state insurance regulation or imposes excessive compliance burdens on firms.”

Americans for Financial Reform, the Center for Economic Justice, the Consumer Federation, and U.S. PIRG oppose this bill. In a joint letter to the House Committee on Financial Services, these organizations expressed their fundamental opposition to the carve-out of ISLHCs from consolidated federal prudential supervision of banking institutions:

“A major contributor to the 2008 financial crisis was the proliferation of institutions that did not have a clear consolidated regulator, or whose overall regulator was not competent to oversee the prudential risks of the institution. The most glaring example was the American International Group (AIG), a global insurance company that engaged in numerous complex financial transactions involving derivatives and securities lending. These activities were beyond the scope of any single state insurance regulator. The Office of Thrift Supervision (OTS), AIG’s primary Federal regulator, also did not have the capacity to properly monitor them. In the end, the losses at AIG were so great that it received the largest taxpayer bailout for a single institution in U.S. history. The Dodd-Frank Act responded to this regulatory failure by eliminating the OTS and centralizing consolidated supervision of bank and thrift holding companies in the Federal Reserve. [This legislation] moves away from this framework by creating a special class of banking institutions for which Federal Reserve prudential oversight would be significantly limited by statute. The legislation is thus a step backwards toward re-creating the patchwork system of pre-crisis regulation that failed so badly to manage prudential and systemic risk. A premise beyond [this legislation] is that the state insurance regulatory system should take the lead role in oversight of prudential risks for bank holding companies that do insurance business. We disagree with this premise... A better approach would be to simply mandate a study of the issue that examines whether the oversight of insurance companies could be improved while still ensuring proper protection against systemic and prudential risks.”

The National Association of Mutual Insurance Companies (NAMIC) and Property Casualty Insurers Association of America (PCI) support this legislation. PCI’s senior vice president of federal government relations, Nat Wienecke, said:

“PCI strongly supports the bipartisan effort… to protect the time-tested state-based insurance regulatory system… The Federal Reserve Board’s duplicative examinations of well-capitalized insurers affiliated with depository institutions increase consumer costs and reduce competition. The Fed should be focused on the safety and soundness of banks and savings and loan institutions, not well-functioning state regulated insurers.”

This legislation passed the House Committee on Financial Services on a voice vote with the support of four cosponsors, including two Republicans and two Democrats.


Of Note: State regulators have a successful history of supervising the insurance business, and the Dodd-Frank Act generally reaffirmed this tradition. However, Dodd-Frank brought SLHCs, which contain thrifts, under the supervision of the Federal Reserve. The effect of these changes was to largely bring thrift and bank charters closer together, making SLHCs treated nearly the same as bank holding companies (BHCs). Critics of this change contend that it has created regulatory inefficiency and unnecessary duplication of effort.

The “Collins Amendment” (Section 171 of Dodd-Frank) authorizes the BOG to apply consolidated capital and leverage requirements to financial firms, without distinguishing between banking and nonbanking aspects of consolidated firms' business. This 2014 legislation clarified that the BOG could apply capital and leverage requirements to take into account an insurer’s presence in a 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.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / matejmo)