Two-tier insurance company standards coming soon from Feds

Insurance Company standards financial federal reserve

The Federal Reserve is going to be issuing a new requirements structure for firms labeled “too big to fail”.

The Federal Reserve has now announced that a two-tier insurance company standards system will soon be created in addition to special liquidity requirements that will be meant for providers that have been called “too big to fail.”

These changes are meant to help to mitigate risks to financial stability, said Fed Governor Daniel Tarullo.

Tarullo made the announcement as a part of his speech to the National Association of Insurance Commissioners (NAIC) on Friday. The fed governor also said that the Federal Reserve will also be proposing capital requirements as a part of the insurance company standards for those it regulates. Moreover, this will be a two-tier system with a different standard for the insurers that have been deemed to be “systematically important” and for those that are smaller holding companies with bank ownership.

The goal of the insurance company standards reform will be to unhook insurers from the future stability of the financial system.

Insurance Company standards financial federal reserveThe Dodd-Frank Wall Street reform law makes it possible for federal regulators to be able to take certain measures to prevent detrimental harm to the entire financial system by taking certain actions such as holding more capital, should they decide that a certain non-bank insurance company such as AIG is at risk of failure. By having the capability of making this determination and taking action, the hope is to be able to enhance the financial stability of the United States and minimize certain possible threats.

According to Tarullo, “the enhanced corporate governance and risk-management standards for systemically important insurance companies will likely build on the core provisions of our consolidated supervisory framework for large domestic and foreign banking organizations,” and that they will also involve the ability to make adjustments when it comes to the insurance industry’s unique requirements and processes.

The liquidity requirements are to be recommended as a component of the enhanced insurance company standards and will likely include cash flow projections, stress testing, internal controls and the types of contingency plans that are in place in order to handle liquidity stress events, said Tarullo.

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