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Created under the auspices of the Dodd-Frank Act to monitor firms that present potential systemic risk to the financial system, the FSOC is a 10-voting member body comprised of representatives from the main financial regulatory agencies as well as an appointed insurance expert, Roy Woodall.
The release of the criteria will go a long way to answering the question of which non-bank entities would be defined systemically important financial institutions (SIFIs) or in more common parlance “too big to fail.” Moreover, the release will be valuable in elucidating the future capital and liquidity requirements for those insurers, which is vital in assessing the company’s relative credit quality, notes rating firm
“Fitch sees clarification of the SIFI criteria as potentially significant in differentiating the credit profiles of certain large insurers, particularly with respect to capital requirements and higher operating costs linked to tougher regulatory compliance requirements,” the company said in a release. “While stronger capital ratios would in and of themselves represent a credit positive, they could also impose higher costs associated with carrying statutory capital. The potential need to carry higher capital against the same risk exposures could make an insurance company designated a SIFI less competitive than its non-SIFI peers.”
Nonetheless, a school of thought exists that insurers that receive a SIFI may actually be at a competitive advantage to their peers, as the perceived government backstop would enable them to increase their risk appetites.
So which insurers could get the SIFI stamp? In a research note,
Nonetheless, the FSOC has yet to indicate whether breaching any or all of the criteria is enough to receive the SIFI designation.
