Are "too big to fail" insurers about to have their tags changed?

Just two companies remain with the label – but a shake-up to the system might change that

Insurance News

By Paul Lucas

They are not just two of the biggest names in insurance, but they are two of the biggest names in the financial world – so much so that American International Group (AIG) and Prudential Financial are, apparently, “too big to fail”.

The label “too big to fail” is a tag slapped on “systematically important” financial institutions (or Sifis for short) – in other words, businesses or financial organisations that are of such importance to a country’s economy that its central bank or government feels it must take measures to prevent it from ceasing to trade or going bankrupt. The concept has its critics, with those opposed believing it can prove to be a moral hazard in that the companies with the tag could potentially profit from it by taking high-risk positions.

In theory it may not sound like a bad thing to have this label attached to your business if there is the potential that the company could be saved from bankruptcy. However, with the tag comes a host of regulatory burdens that insurers are keen to escape from. Indeed earlier this year a federal judge ruled in favour of US insurance giant MetLife when it challenged the designation.

Now, AIG and Prudential appear to have their hopes pinned on a US government shake-up.

Whereas systematically important banks have their designation set in law as part of the post-financial crisis Dodd-Frank reform, whether or not insurance companies should have the label is determined by the Financial Stability Oversight Council (FSOC) which is made up of some of the country’s leading regulators such as the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission. However, Financial Times research has revealed that seven of the 10 voting members will have seen their terms expire or will have gone by the end of next year. Under existing rules, designations need a two-thirds majority vote, although the chairman of the FSOC, the Treasury Secretary, also carries the right to veto.

The new chairman, chosen by Donald Trump, will be ex-Goldman Sachs banker Steven Mnuchin, and hopes are high that this will shake things up for the insurance giants.

Speaking to the Financial Times, Capital Alpha’s director Ian Katz remarked that “most Republicans have not supported the Sifi designations” and that he expects “by early 2018, give or take a little bit, AIG and Prudential will have their Sifi designations rescinded”.

Back in April this year, Prudential Financial spokesman Scot Hoffman was asked by USA Today about  whether it could follow in the footsteps of MetLife in an effort to join the exodus from the “too big to fail” label and said: “We continuously review developments that impact our company, and we are evaluating what is in the best interests of the company and our stakeholders”. Meanwhile AIG CEO Peter Hancock told CNBC that the federal court decision “certainly opens the door to that opportunity”.

Now it appears that with the Republicans set to take power, the door has swung open even wider – and two household names in insurance internationally may soon be free of requirements to hold capital reserves against losses and strict regulatory oversight.

Related stories:
These insurers may trigger a financial crisis if they fail
US lawyer asks court to reinstate MetLife too big to fail tag

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