Baribeau

Question 1

Insurers were likely included in the scope of Dodd Frank because the “Financial Products” division of the insurer AIG was heavily involved in the crisis. List 2 reasons that this may have been inappropriate

Answer 1

• This division was a banking division which was unrelated to AIGs insurance operations.
• When the crisis started, the Financial Products division was actually already under federal regulation by the Treasurys Office of Thrift Supervision (OTS)

Question 2

List some impacts of the Dodd Frank act

Answer 2

• provided the Federal Reserve System (Fed) limited regulatory authority
• established the Federal Insurance Office (FIO), part of the US Treasury, to monitor the insurance industry
• allows the Fed & FIO to influence/ be influenced by the International Association of Insurance Supervisers (IAIS)

Question 3

2 types of insurers that the Fed is authorized to regulate

Answer 3

1. Systematically Important Financial Institutions (SIFIs): institutions that could cause a national systemic economic disruption if they fail.
2. Insurance holding companies that own banks or thrifts

Question 4

Reasons that the classification of insurers as SIFIs turned out to be quite controversial

Answer 4

• Designation results in significant additional regulation
• The business models between insurers & banks are very different
• It has been acknowledged that insurers made minimal contribution to the crisis
• The criteria to be classified as a SIFI is unclear: there have been no guidelines published that would allow insurers to get off or stay off the list

Question 5

List some functions of the Federal Insurance Office

Answer 5

• aggregates insurance information from various sources
• monitors the insurance industry:
• Identifies insurance activities that could contribute to a financial systemic crisis
• Develops federal policy about nationally or internationally important insurance issues
• Consults state government on insurance matters
• monitors the availability and affordability of insurance
• work with the US Trade Representative to negotiate covered agreements with foreign regulators

Question 6

Requirements of insurers regulated by the Fed

Answer 6

• Develop living wills (resolution plans) to be used if there is a bankruptcy
• Meet liquidity requirements
• Undergo stress testing
• Meet capital standards

Question 7

Lost some of the most significant effects on P&C “actuaries”

Answer 7

• Dual regulation: there could be regulations impacting accounting and solvency standards that could result in an inconsistent & non-level playing field
• Dual regulation: due to the additional federal regulatory body, regulations would be overly restrictive & expensive to follow
• Increase in capital requirements
• Standardization requirements drive commoditization
• significant increase in compliance costs for insurers that own banks

Question 8

List issues if the international standards do not reflect the current state based regulation

Answer 8

There could be:
* Less product innovation
* Higher costs
* Few options for consumers
* Insurers could be forced to consolidate, resulting in fewer insurance options; and larger insurers that are more likely to become systemically important.