September 2013


FRB Clarifications Regarding Basel III and Capital Plans and Stress Testing

On September 24, the FRB issued two interim final rules that clarify how companies should incorporate the Basel III regulatory capital reforms into their capital and business projections during the next cycle of capital plan submissions and stress tests.

Banks with Greater than $50 Billion in Assets

The FRB rule clarifies that these companies must incorporate the revised capital framework into their capital planning projections and into the stress tests required under Dodd-Frank using the transition paths established in the Basel III final rule.

The interim final rules also clarify that a company will not be required to use the advanced approaches in the Basel III capital rules to calculate its projected risk-weighted assets in a given capital planning and stress testing cycle unless it is notified prior to the start of the process.

Banks between $10 Billion and $50 Billion in Assets

This fall, banks in this size range will be conducting their first company-run stress tests under the FRB’s rules implementing Dodd-Frank.  These companies will be required to calculate their stress test projections using the current regulatory capital rules during the upcoming stress test to allow time to adjust their internal systems to the revised capital framework.


IRS Priority Guidance Plan

In August, the IRS released its initial version of the 2013-2014 Priority Guidance Plan.  The Plan contains 324 projects identified as priorities for allocation of IRS resources during the twelve-month period from July 2013 through June 2014.

There are nine items included under the Insurance Companies and Products heading.  Most of them apply to annuities, long-term care or health insurance; none of the items are new (identified in previous guidance plans).  The final item under this category is “Regulations under §7702 defining cash surrender value.”  It is not entirely clear what that topic encompasses.

The IRS has marked final regulations under §312 regarding the allocation of earnings and profits between a transferor and a transferee corporation when assets are transferred in connection with a reorganization.  Although not directly related to insurance, it may have indirect implications.  Proposed regulations for this topic were published in April 2012.


FSOC Final Designation of Prudential as a Non-Bank SIFI

On September 19, Prudential issued a press release confirming that its appeal to the Financial Stability Oversight Council (FSOC) of its June designation as a systemically important financial institution had been rejected (i.e., FSOC again voted Prudential as a SIFI).  Prudential has 30 days to consider its response to FSOC’s determination (e.g., accept the designation or challenge the designation in the judicial system).

The NAIC posted the dissenting view by Director John Huff, the non-voting insurance regulator representative on FSOC.  Mr. Huff’s views challenge the basis applied to Prudential by the FSOC and express a lack of understanding and/or appreciation for the insurance regulatory system.  His views discuss run risk (e.g., mass policyholder surrenders) as well as insurance regulatory responses such as receivership and ring fencing.  He also expresses concern that many of the aspects of the decision to designate Prudential were not firm-specific.

In a separate matter, the Financial Stability Board (FSB), an international body published a list of nine “global systemically important insurers” (GSIIs) in July.  Prudential, MetLife and AIG were among the entities identified in that listing.



Baker v. American Greetings – Settlement Approved

As reported in our May 2013 LRA Update, the parties agreed to settle this matter.  A fairness hearing was held on September 20 and the court (Northern District of Ohio) approved the settlement.

As we reported previously, the settlement is for $12.5 million.  One third (or ~$4.2 million) will be paid to plaintiffs’ counsel.  If all potential class action members file valid claims, the amount per claim is just under $10k.


Mai Thao v. Midland National Life Insurance

Last month, we provided an update regarding this matter.  The plaintiff is contesting Midland’s cost of insurance (COI) rate setting practice of including an “Expense Add-on” in the computation.  The district court dismissed the suit and awarded attorneys’ fees to Midland.  Mai Thao appealed the rulings to the US Circuit Court of Appeals (7th Circuit).

On September 16, Midland submitted its appellee brief.  Noteworthy counter arguments included:

  • Thao did not analyze the 14 other places in the policy that use the phrases “based on” or “based upon.”  Midland asserts that none of which are consistent with Thao’s interpretation of the challenged provision.
  • Midland must consider more than the five listed characteristics (i.e., no combination of the five characteristics points definitively to any single number to use as the COI rate).
  • The five “based on” characteristics are used as part of the formulation to avoid discriminating against two insureds who have those same characteristics.
  • Removing the Add-On column of the COI solver workbook would not result in rates that are reflective of Midland’s mortality expectations.  The base scale in the workbooks “is loosely related to mortality expectations,” but it “does not itself constitute Midland’s mortality expectations for any set of policyholder characteristics.”
  • Midland’s interpretation allows it to set a COI rate higher than its expected mortality rate early in the life of a policy and a COI rate lower than its expected mortality rate later in the policy’s life.
  • Thao contends that allowing Midland to consider its administrative costs in setting the COI rate would allow Midland to “deduct from the Policy Fund the same expenses twice.”  Midland notes that there is nothing in the policy tying the Expense Amount to a particular basket of administrative expenses.

We will continue to track this matter and look forward to the 7th Circuit’s ruling.

Citation: Mai Thao v. Midland National US Circuit Court of Appeals – 7th Circuit Case Number: 13-1272



NAIC Summer National Meeting

The NAIC held its summer national meeting from August 22–27.  Although the NAIC has established a number of committees and working groups with defined objectives, numerous reports from the summer meeting indicate that discussions regarding federal regulatory activities were a particular point of emphasis.

The insurance industry and regulators continue to advocate in opposition to bank-centric capital requirements, such as Basel III.  MetLife presented an alternative to Basel III that would be based on the aggregated activities of the particular entities within a family of companies (e.g., insurance risk-based capital framework for insurance companies and other frameworks, like Basel III, for non-insurance entities within the family).

It appears that some initiatives we have been tracking (e.g., regulatory considerations concerning certain hybrid, separate account products) were not specifically covered during this meeting.  Sidley Austin published an Insurance Regulatory Update providing a detailed report on the activities and discussions that took place during the meeting.