Though no company likes the prospect of more regulation, the nation's insurance companies have one less thing to worry about when it comes to their new Federal Reserve counterpart, Thomas Sullivan, who was appointed to the position of senior advisor for insurance oversight last week.
In the spotlight
Thanks to the central role American International Group (NYSE:AIG) played in the 2008 financial crisis, insurers were highlighted as one more industry that needed heightened regulatory oversight. Since the passing of the Dodd-Frank Act, insurers have been fighting a battle against blanket regulations that better suit the banking industry's business model and would unfairly penalize normal insurance practices.
With a new Senate bill passed last week that gives the Federal Reserve flexibility to adapt capital rules for insurers it oversees, the industry can relax a little bit. At the same time, the Federal Reserve announced a new hire as senior advisor for the oversight of non-bank systemically important financial institutions. So far, AIG, Prudential Financial (NYSE:PRU), and General Electric's finance arm have all been deemed SIFI, with MetLife in the later stages of review for the designation.
Mr. Sullivan goes to Washington
With a 20-year tenure at The Hartford Financial Services Group under his belt, plus experience as state insurance commissioner of Connecticut from 2007 to 2010, and an active member of the National Association of Insurance Commissioners, Thomas Sullivan fills a very important position within the Fed, which is well versed in bank regulation but lacks experience with non-bank institutions.
Since insurers were previously regulated solely at the state level, Mr. Sullivan has expert knowledge of the industry's common practices -- which vary greatly from bank operations -- allowing the Fed to competently adapt new capital rules to the complicated businesses deemed systemically important.
What's to come
Though Sullivan didn't address any specific questions about his approach to the new position at the Fed following the announcement, investors can look back to 2009 for a sense of how he'll approach the insurance industry's new regulatory oversight.
In a testimony to Congress during the recession, Sullivan (as a NAIC representative) was a staunch supporter of the state-lead regulatory setup for the insurance industry:
State regulation of insurance has protected insurance consumers and companies from the worst of the financial crisis [...] The insurance sector is critically important, but the business of insurance has not created the kinds of unrestrained and unregulated systemic risks that reform efforts seek to manage or prevent.
Though he was skeptical of the reform efforts that were eventually rolled into the 2010 Dodd-Frank Act, Sullivan's testimony did include an advisory statement that supervision of larger, complicated businesses needed improvement.
Investors and insurers may not like that the financial crisis has spurred on a heightened sense that the industry needs more oversight, but both groups should be comforted that they have an experienced ally within the walls of the chief regulator. The capital rules for SIFI-designated firms are still up in the air, but with Sullivan as chief advisor, you can bet the rules will be appropriate and just.