Disastrous Application of Dodd-Frank Law to Insurance Company

The Financial Stability Oversight Council (FSOC), an unaccountable, secretive task force of financial bureaucrats created by the Dodd-Frank “financial reform” act of 2010, has decided to designate America’s largest life-insurance company, MetLife, as a “systemically important financial institution.” What this “SIFI” designation means is that the federal government officially considers MetLife “too big to fail” and will subject the company to the same Dodd-Frank bailout regime set up for banks.

Many firms would see being tagged as a too-big-to-fail SIFI as a blessing, since the designation confers on a firm a presumptive strong competitive advantage, signaling to investors that the government won’t let it fail. That’s why big banks and MetLife competitor AIG, who have received billions in taxpayer bailouts during the financial meltdown, have eagerly embraced their SIFI status.

But MetLife, to its credit, has publicly stated it’s not too big to fail and does not want the special privileges that come with the SIFI status.
Unlike AIG and the big banks, MetLife has never taken a dime in taxpayer bailouts. All it is asking for now is not a handout, but for the federal government to keep its hands off of the successful business model MetLife has used for decades to provide life insurance to millions of satisfied customers.
Part of the FSOC’s SIFI scheme is that if one SIFI fails, the other SIFIs pay the bailout costs.

As my colleague Iain Murray described in The American Spectator, “there are two classes of SIFIs — 1) the high-rolling institutions that may be tempted to take unreasonable risks with the money people have entrusted to them, and 2) the large stable firms that actually have the money (again, entrusted to them by clients) that can be expropriated by government to pay for the mistakes of the first class.”

The conservatively managed MetLife is clearly in the second category, so FSOC has designated it and its policy holders and investors to be among those whose money would be taken to bail out the “high-rollers.”

Unfortunately, this is not the worst part. The SIFI scheme, combined with other provisions of Dodd-Frank, requires that insurance companies be regulated by the exact same capital rules as banks.

This theory makes even liberal lawmakers like Sen. Sherrod Brown, D-Ohio, balk. Brown has said: “I want strong capital standards, but they have to make sense. Applying bank standards to insurers could make the financial system riskier, not safer.” Also opposed to the idea of treating insurers the same as banks is none other than former Rep. Barney Frank, D-Mass., the co-author of Dodd-Frank.

Additionally, imposing bank capital standards on insurers would raise costs for life insurance consumers by $5 billion to $8 billion per year, according to the economic consulting firm Oliver Wyman. These costs could hit policy holders both through higher premiums and reduced benefits.

Fortunately, a piece of legislation is hovering around the Capitol that could partially save the day. The Insurance Capital Standards Clarification Act of 2014 (S. 2270), which the Senate passed unanimously on June 3, would revise Dodd-Frank by clarifying that it was not Congress’s intent to apply bank capital rules to insurance firms.
Now, all the House has to do is pass an identical companion measure, the bipartisan H.R. 4510, without any unrealistic amendments, and send it to President Obama’s desk.

The Financial Stability Oversight Council has not only declared war on MetLife, it’s declared war on common sense. As in any war, there is likely to be collateral damage — in this case, MetLife’s policyholders, employees, and in a worst-case-scenario, U.S. taxpayers.