Dodd-Frank Provisions Still Hold Concern for Insurers
The Dodd-Frank Act of 2010 brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It represented a significant change in the American financial regulatory environment affecting all federal financial regulatory agencies and almost every aspect of the nation’s financial services industry, including insurance.
The essential nature of insurance has given rise to a large and dynamic industry in the United States with more than $1 trillion in annual premium income, $4.5 trillion in assets and more than 2 million employees.
The industry necessarily maintains assets must be large enough to pay claims in times when asset values fluctuate as underlying market conditions shift due to developments in the financial markets and/or the broader economy. The good news is that the insurance industry’s capital resources are at, or near, all-time record-highs and are growing.
The strength of the industry is without parallel within the financial services segment. P/C and virtually all life insurers were able to operate normally throughout the financial crisis and have continued to do so. Consequently, financial industry regulations must avoid imposing bank-centric regulations on the insurance industry, whose operating record and business model are distinct from that of the banking sector.
Institutional Investor
The insurance industry’s need to maintain large holdings of assets to back claims and satisfy regulators and ratings agency requirements implies that the industry is one of the largest institutional investors in the world. Indeed, the industry is usually ranked among the top three institutional investors across a range of asset categories.
Insurers are necessarily conservative investors, and as such concentrate their investments in relatively low risk, highly liquid securities, especially bonds. P/C insurers hold two-thirds of their invested assets in bonds. Life/annuity insurers hold three-quarters of their portfolio in fixed income securities.
The sheer size of the industry’s investment portfolio suggests that its role as an institutional investor is important on many levels. Forty-four percent of the P/C insurance industry’s bond portfolio is invested in municipal securities (munis) issued by all 50 states and thousands of counties, cities and towns nationwide. In other words, P/C insurers alone in 2011 held bonds that served to finance some $331 billion in projects such as schools, roads, bridges, mass transit initiatives and health care facilities. Life and annuity insurers held approximately 11 percent of their portfolio in such investments last year, translating into a $123 billion stake in state and local government financing. Hence collectively, the insurance industry has investments in state and local projects and initiatives that now exceed $450 billion.
The insurance industry is an important U.S. employer, providing work for 2.3 million people, with a total payroll approaching $200 billion. These figures include not only employees of insurance carriers, but also agents/brokers, third-party administrators and others.
Fundamentally Different
In the current era of ongoing financial market uncertainty and tsunami of federal regulations, it is important to never lose sight of the fact that insurers are fundamentally different from banks. Congress acknowledged this fact by largely leaving intact the existing system of state-based regulation under Dodd-Frank. Yet that recognition is not complete. Several provisions could reduce insurers’ ability to mitigate risk on their own books or adversely impact the capital available for underwriting risk.
The business of insurance was not the cause of the U.S. financial crisis that began in 2008. Consequently, insurance was not the focus of the Dodd-Frank Act, and insurers were exempted from much of the regulation to which banks and other financial institutions were subjected. However, the danger is not over.
Congress must recognize that a number of Dodd-Frank provisions, including the Volcker Rule and provisions related to resolution of Systemically Important Financial Institutions (SIFIs) when fully implemented or because of potential misinterpretations of the Act’s intent, could reduce the ability of insurers to accumulate capital or mitigate risk — which could negatively impact the economy overall.