This week brought big news on two fronts in the world of allegedly “too big to fail” insurers.

By a nine to one vote, with former Kentucky Insurance Commissioner Roy Woodall as the lone dissenter, the Financial Stability Oversight Council voted Friday to designate MetLife Inc. as a systemically important financial institution. In a statement, Treasury Secretary Jack Lew said the council concluded after an 18-month investigation that “material financial distress at MetLife could pose a threat to U.S. financial stability,” adding that:

Designation of a nonbank financial company is a critical tool for the Council to address potential threats to U.S. financial stability.  Consistent with its mandate, the Council remains focused on protecting the broader economy from the types of risk that contributed to the financial crisis.

FSOC is the “college of regulators” created under the Dodd-Frank Act and charged with monitoring, preventing and ultimately resolving broad systemic risks to the U.S. economy. Under the FSOC process, certain non-bank financial institutions designated as SIFIs may be subject to heightened scrutiny and capital standards, both by the council and by the Federal Reserve Board. FSOC previously has slapped the SIFI tag on fellow insurers Prudential Financial and American International Group.

Though the company challenged the preliminary designation back in September, in some ways, it was years in the making. In the case of MetLife, the designation amounts more rejoining the group of SIFIs. The company previously was organized as a bank holding company, and went through the first several rounds of the Fed’s annual “stress tests,” dating back to the height of the financial crisis in early 2009.

However, there long have been questions about whether the bank-centric focus of the Fed’s Comprehensive Capital Analysis and Review test was appropriate for a company primarily engaged in the business of life insurance. These concerns reached a boiling point in 2012, when the company failed the stress test, as the Fed found that it did not have the minimum 8 percent total risk-based capital it estimated was necessary to withstand a stress scenario.

Largely in response to the MetLife scenario, Congress this year has been debating various versions of legislation to clarify that state-regulated insurers who are part of the same holding company as a depository institution, or that are subject to Fed supervision as a nonbank holding company, are not to be subject to the minimum leverage and minimum risk-based capital requirements established by federal banking regulators. Among other changes, the bill allows insurers who must report their financial results to federal banking regulators to do so using the Statutory Accounting Principles employed under state insurance law, rather than Generally Accepted Accounting Principles.

After much debate and procedural mire, Congress reported the S. 2270 version of the bill to the White House this week, which President Barack Obama signed on Dec. 18. The bill does not preclude FSOC’s designation of MetLife, Prudential and AIG, though it would conceivably alter how financial strength tests are applied to the companies going forward.

In a separate dissenting opinion, Woodall – the only voting member of FSOC with insurance experience, as Missouri Insurance Commissioner John Huff and Federal Insurance Office Director Michael McRaith are both non-voting members – criticized the FSOC analysis of MetLife, saying it presumed “that all current operations and activities are static without consideration of any dynamics or responses occurring before a presumed insolvency.”

Moreover, Woodall said the analysis was dismissive of the state-based regulatory regime that governs insurance and the willingness and ability of state regulators to act in advance of a potential insolvency. He added that the analysis relied on “implausible, contrived scenarios as well as failures to appreciate fundamental aspects of insurance and annuity products,” and that even in the unlikely case that the company or its major operating units did face a solvency crisis, it isn’t apparent that MetLife provides “any critical financial service or product for which substitutes are unavailable.”

I do share concerns about some of MetLife’s activities, particularly in the non-insurance and capital markets activities spheres, and in the resulting exposures identified and described in the Council’s Notice of Final Determination in the Company Overview and Exposure Transmission Channel sections. These activities might conceivably pose a threat to the U.S. financial stability under certain circumstances. It is these types of activities that should be fully evaluated under the Second Determination Standard, as opposed to the flawed Council analysis under the First Determination Standard.

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