February 2, 2012

Download - FIO Focus, Issue No. 5 [.pdf]

FIO Focus is a periodic newsletter providing information about, and updates related to, the Federal Insurance Office. Prior issues of the FIO Focus have included summaries of public comments submitted in connection with the FIO's study of the insurance industry and discussions concerning the FIO's responsibilities.

Awaiting the Release of the Federal Insurance Office's Modernization Report

The insurance industry is eagerly anticipating the Federal Insurance Office (FIO) Director's report on modernizing and improving U.S. insurance regulation. It has been widely reported that the substance of the report is currently being vetted and will then be submitted to Congress.

Secretary Geithner may address the FIO Report during a Press Conference on the State of Wall Street Reform

Treasury Secretary Tim Geithner is scheduled to deliver remarks on the state of financial reform at 4:00 PM EST on February 2, 2012. According to the Treasury Department, "Secretary Geithner will review the progress made to date and outline priorities and challenges for the year ahead in financial reform and then take questions from the media."

Secretary Geithner's remarks will follow the Financial Stability Oversight Council's (FSOC) first meeting of 2012.

The Federal Insurance Office's Involvement in the Federal Stability Oversight Council

Under the Dodd-Frank Act, the FIO Director is a non-voting member of the FSOC. The FSOC consists of ten voting members and five non-voting members. Three FSOC members have insurance expertise. Those members include the FIO Director, a non-voting member representing state insurance commissioners and a voting member appointed by the President.

Former Kentucky Insurance Commissioner, S. Roy Woodall, was appointed by President Obama and confirmed by the Senate to serve as FSOC's voting member with insurance expertise. John Huff, the Director of the Missouri Department of Insurance, is representing state insurance commissioners.

FSOC's primary task is to identify risks to the stability of the U.S. financial system. FSOC's responsibilities include facilitating information sharing and coordination among federal regulators; designating systemically important financial institutions (SIFI); and determining threats to the financial stability of the U.S.

FSOC is currently developing rules for determining SIFI status for non-bank financial companies, including insurance companies. In October 2011, FSOC released a proposed rule for determining non-bank SIFIs. The proposed rule states that a company will be considered for SIFI status if it has more than $50 billion in "consolidated" assets - which includes assets in the parent company, affiliates and subsidiaries - and the consolidated company has any of the following:

• $30 billion in gross notional credit-default swaps outstanding;
• $3.5 billion in derivative liabilities;
• $20 billion of outstanding loans borrowed and bonds issued;
• 15-to-1 leverage as measured by total consolidated assets to total equity; or
• 10% ratio of short-term debt to total consolidated assets.

Non-banks with such assets will be subject to a robust analysis of their potential threat to the U.S. financial system. Any non-bank that is determined by FSOC to pose a threat to the financial system will have an opportunity to request a hearing to explain why they are not systemically important. A two-thirds vote of FSOC, including the vote of the chairman, is needed to designate a non-bank financial company as a SIFI. Companies designated as SIFIs will be subject to oversight by the Board of Governors of the Federal Reserve.

The FIO may also make recommendations to the FSOC regarding any insurer or affiliates of an insurer for SIFI status.

SIFI status for non-banks must be reaffirmed annually.

Background on the Office of Financial Research

The Office of Financial Research (OFR), created by the Dodd-Frank Act, resides within the Treasury Department. The OFR is authorized to collect information from financial companies, including insurers, and is responsible for analyzing the data for FSOC. In December 2011, President Obama nominated Richard Berner, a senior counselor to Treasury Secretary Timothy Geithner, to serve as Director of the OFR. Richard Berner is currently awaiting confirmation by the Senate.

Under the Dodd-Frank Act, the OFR is to include a Data Center, and a Research and Analysis Center.

The Research and Analysis Center is responsible for:

• Monitoring, investigating and reporting on risks to the financial stability of the U.S.;
• Investigating disruptions and failures in financial markets;
• Evaluating and reporting on stress tests or other stability-related evaluations by U.S. regulators;
• Creating or sponsoring research to improve financial regulation; and
•  Promoting financial risk management best practices.

The Data Center is responsible for collecting and maintaining information received by the OFR. Under the Dodd-Frank Act, the Data Center is to maintain a publically accessible "financial company reference database" and a "financial instrument reference database."

The OFR is also:

• Responsible for maintaining catalogs of all financial entities and financial instruments reported to the OFR; and
• Tasked with collecting information regarding financial transactions and the positions of financial companies. Under the Dodd-Frank Act, "financial transaction data" includes "the structure and legal description of a financial contract, with sufficient detail to describe the rights and obligations between counterparties and make possible an independent valuation."

In addition, the OFR may collect information from other federal agencies, commercial data providers, publicly available data sources or financial entities. It is authorized under the Dodd-Frank Act to share collected information with FSOC members and their regulatory agencies.

The OFR Director has the authority to issue a subpoena for information after making a written record that the requested data is both necessary and not available from the primary regulator of the entity subpoenaed.

The OFR may share collected data with the financial industry or the public after consulting with members of FSOC, provided that the information does not threaten intellectual property, confidentiality or market stability.

FIO Resource Team