The concept is to treat exceptionally large firms differently from others within the industry.
The Federal Reserve proposed new insurance company capital standards as a part of a two tiered system that had already been expected for the industry and that is expected to provide significant protection for the American economy.
Within this system, major insurers are going to have different capital requirements applied to them.
Prudential Financial Inc. and American International Group Inc. will both have different insurance company capital standards applied to them due to their size and impact on the U.S. economy. They will, for instance, be required to hold adequate capital for withstanding risks to the American financial system.
The Federal Reserve received regulatory authority over those two massive insurers as well as 12 insurance companies owning banks, when the 2010 Dodd-Frank reform law came into effect. That law was passed following the last economic crisis faced by the country and the globe and was designed to make the oversight of the government over Wall Street stronger.
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There are two different types of insurance company capital standards that will be put into place.
The insurance companies that own banks will have a different set of capital requirements than other insurers in the country. As of Friday, when the Fed held an open hearing on this subject, the details of the capital requirements for the two tiers of insurers overseen by the central bank have not yet been completely hammered out.
The proposals themselves have been under construction for the last five years. They are meant to force insurers to keep adequate capital within their reach in order to fend off situations such as insolvency or excessive borrowing, so that the 2008 financial crisis scenario will not be repeated.
Both Prudential and AIG have been labeled as insurers that are “too big to fail” due to the size of the impact they can have on American financial stability. For those firms, the Fed has now proposed insurance company capital standards that focus on the assets and liabilities of the insurers and break them down into risk-based segments in terms of the size of the threat they pose and the funds that would be required in order to overcome that threat.