trending Market Intelligence /marketintelligence/en/news-insights/trending/sc3g4kyoo1b2li6vvwu1rq2 content esgSubNav
In This List

Activities-based approach needs to be done right, Fed insurance official says

Blog

The Big Picture 2022 Insurance Industry Outlook

Podcast

Next in Tech | Episode 37: Insurance impacts on technology and vice versa

Case Study

A Prestigious Global Business School Gains a Competitive Edge

Video

S&P Capital IQ Pro | Unrivaled Sector Coverage


Activities-based approach needs to be done right, Fed insurance official says

Regulators should be cautious about measuring an insurer's systemic risk by its business activities rather than at a company level, a key Federal Reserve Board official said at a recent conference.

While discussing President Donald Trump's administration's pivot to an activities-based model for evaluating insurers' financial stability, away from an entity-based approach, Federal Reserve Board Associate Director Tom Sullivan said that although an activities-based approach is better, it is "not a panacea" for measuring risk. Sullivan made clear that he was not speaking on behalf of the Federal Reserve Board.

That activities-based approach has been lauded by the industry, which long resisted the previous administration's designation of American International Group Inc., MetLife Inc. and Prudential Financial Inc. as systemically important financial institutions, or SIFIs.

The Financial Stability Oversight Council, chaired by the U.S. Treasury Department secretary, has the ability to designate nonbank financial institutions and activities as systemically risky. So far, it has only designated firms or entities, an approach that the Trump Administration is shedding in favor of the activities-based model while still recognizing its right to designate insurers. The new approach was favored in Treasury’s 2017 executive report on asset management and insurance, and the international insurance standard-setting community is also shifting to an activities-based approach.

Sullivan leads a policy team on insurance supervision, which is in the midst of developing capital standards. At the conference sponsored by Indiana University and the law firm Faegre Baker Daniels, Sullivan explained that there is risk in looking at the activities of companies if the activities' relationships to each other are not also scrutinized.

That siloed approach to assessing the activities of an insurer avoids "correlative risk," according to Sullivan, who served as Connecticut's insurance commissioner during the financial crisis. If regulators look at one activity but not others in relation to that activity, they will miss the ways activities amplify or neutralize each other, he said.

Still, "an activities-based approach can bear fruit," Sullivan acknowledged. He appeared to favor employing tools to look at liquidity risk and cautioned against an obsession with capital. "We get so dug in looking at capital," he said.

Sullivan described having a viscerally negative reaction when he reviewed the mechanics of the entity-based approach, which rendered some insurers as SIFIs and others not. "We will not support anything that supports a broken system," he said.