Systemic resolution authority and state regulation of insurance can work without the need for a federal insurance regulator. States have broad authority to take insurers into receivership, effectively “walling off” their assets from the holding company and providing priority to policyholders. Any resolution of a systemically risky holding company should require collaboration with the functional regulators so that, in the case of insurance, assets set aside to pay claims are not raided to pay counterparties from weakly regulated segments of the company.
The Obama Administration and Congress are considering establishment of a resolution authority for systemically significant companies. This concept would expand FDIC authority to non-banks, and could include holding companies that own insurers. The authority would allow the government to step in and take control of a failing institution outside of bankruptcy, and without the need for a bailout. It is unclear from Treasury and Federal Reserve proposals how this authority would interact and coordinate with State insurance regulators’ broad and proven receivership authority and State guaranty funds.
Key Points:
- Unlike bankruptcy law, State receivership law prioritizes policyholders to ensure they are made whole before other creditors – this should not be lost in any new regime.
- Systemic resolution authority should not jeopardize policyholder funds by being able to raid the assets of well regulated insurers to help absorb losses from lightly regulated sectors within a holding company.
- States have an effective guaranty fund system which pays policyholder claims in the event of an insurer’s insolvency. This system cannot be maintained without the state regulator having the ability to monitor and regulate the solvency of its member companies that contribute to the system.
- The Treasury resolution proposal appears to require no consultation with functional financial regulators before the FDIC can act. Consultation with the functional regulator(s) of each financial entity that is part of the larger entity in question must be an essential part of any regulatory scheme adopted.
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