By Ryan Tracy
WASHINGTON -- Big U.S. insurers Prudential Financial Inc. and American International Group Inc. would face tougher capital requirements than their peers under new rules outlined for the first time Friday by the Federal Reserve's point-man on regulation.
Fed governor Daniel Tarullo said the Fed will propose rules "in the coming weeks" that will have higher compliance costs for insurers considered "systemically important" to the U.S. financial system.
That group currently includes AIG and Prudential, but not MetLife Inc., which won a court case overturning its systemic label earlier this year. The government has appealed MetLife's win.
The Fed gained authority for the first time to regulate insurance companies under the 2010 Dodd Frank law, but has taken more than five years to propose rules for the industry. Mr. Tarullo's remarks Friday were the central banks most detailed description to date of the pending regulations.
Mr. Tarullo didn't give all the details of the Fed rules, but he sketched them out in a speech to the National Association of Insurance Commissioners, a group of state regulators. He said the Fed will propose different rules for systemic insurers than for other insurance companies it regulates.
The central bank also regulates a dozen U.S. insurance companies that own banks, including Nationwide Mutual Insurance Co. and State Farm Mutual Automobile Insurance Co.
"Our tentative conclusion is that a bifurcated approach to a capital regime for insurance companies makes sense," Mr. Tarullo said.
The rules for non-systemic insurance companies are likely to have a "relatively low regulatory burden," aggregating capital requirements that already exist at the state level, Mr. Tarullo said.
Prudential and AIG are likely to face a different capital requirement based on "risk segments," with the Fed placing assets and liabilities in categories based on the potential risks they pose to the company and the financial system, Mr. Tarullo said. The companies would have to maintain more capital against segments with higher risk, he said, adding that the rules for systemic firms would result in higher compliance costs.
Mr. Tarullo said the Fed also intends to impose stricter rules on systemic firms in the areas of corporate governance, risk management, and liquidity, following on a mandate from Congress to set out tougher standards on firms that have a size and complexity that a crisis at that institution could ripple through the broader financial system, the way AIG's woes aggravated the 2008 financial crisis.
He said the firms would likely face capital and liquidity "stress tests" examining their ability to fund themselves and keep operating in a crisis.
Mark Grier, vice chairman of Prudential, said on the sidelines of the conference after Mr. Tarullo's speech that it was too early to tell the impact of the coming Fed proposal.
"Details will matter," he said in a brief interview. "I think they are on a good track in terms of the time they spent thinking this through and I'm optimistic that the details will come out in a way that reflects the right considerations for insurance as well as the right calibration relative to our risks and our balance sheet."
Mr. Grier said the Fed's approach looks "very different" from the current state risk-based capital regime and he will be particularly focused on adjustments Mr. Tarullo said the Fed will make to the way his company's balance sheet is measured based on generally accepted accounting principles.
An AIG spokeswoman had no comment.
State regulators were also listening to the speech closely. They have been developing their own regime for looking for risks across insurance companies after the AIG debacle.
"It sounds like, at least at first blush, that we are very aligned," said John Huff, director of the Missouri Department of Insurance and president of the state insurance commissioner's group, in an interview.
"Everybody accepts" that systemic insurance firms will face higher capital requirement from the Fed, "so I don't think that is something that is of concern. The question is just how is it structured," he said.
Mr. Tarullo said the Fed would issue an "advance notice" of the rules, giving the industry multiple chances to comment on them.
Separately, Mr. Grier said Prudential is closely watching whether MetLife ultimately wins its legal battle to overturn stricter federal oversight. "We are going to do what is in the best interest of the company as we see how this plays out. We will be paying attention to the appeal," he said. "It is a real-time problem for us because there is a lot more yet to play out."
Write to Ryan Tracy at email@example.com