The US government is abandoning efforts to impose stricter regulation on insurance companies’ financial activities. The new policy is coming at a time when serious questions are being raised about the financial health of some American insurers.
The US Treasury Department is dropping an appeal in a court case involving MetLife and the Financial Stability Oversight Council’s (FSOC), Pensions & Investments reported. The case; MetLife, Inc. v. Financial Stability Oversight Council, involved the FSOC’s designation of the insurer as a “nonbank financial institution.” Such a designation would have subjected MetLife to more oversight and regulation.
“I am pleased that the Justice Department has settled the MetLife case, consistent with the recommendation by a majority of FSOC voting members,” Secretary of the Treasury Steven T. Mnuchin said in an 18 January press release.
Instead of tightening regulations the Treasury will work more closely with nonbank financial institutions and try to fix their problems, the press release indicates. Under a new policy adopted in November 2017, the FSOC will analyse institutions’ level of risk and conduct a cost-benefit analysis before taking action.
Efforts to increase the transparency of nonbank institutions’ finances and enhance communication between institutions and the Treasury will be made. The hope is to reduce the cost of compliance and make the process more efficient.
Mnuchin’s action effectively ends the Obama administration’s policy of using regulation to reduce risks from nonbank financial institutions, Reuters pointed out. Instead, Mnuchin and President Donald Trump believe cooperation between government and institutions is a better means of managing risks.
The FSOC was the organization set up to monitor the financial health of large institutions in America after the crisis of 2007-2008. Its task is to identify risks of default or other problems at entities such as banks and insurance companies and take efforts to mitigate that risk. The Treasury Secretary services as chairperson of the FSOC.
The FSOC action is sure to generate controversy because MetLife admitted to “material weakness” in finances on 29 January 2018, Bloomberg Markets reported. The insurance giant admitted it had not set enough money aside to cover some annuity and pension payments.
Disturbingly, MetLife admitted to losing track of some annuity and pension beneficiaries. Such admissions are an indication of sloppy administration and poor recordkeeping.
MetLife boosted its reserves to $575 million in an attempt cover pension and annuity payments. The company also postponed its earnings call and the date of release for its 4th Quarter 2018 financial numbers to 13 February, for reasons not made clear.
US insurers seriously exposed to pension risks
MetLife is one of a number of American insurers that has taken on serious risks by acquiring pension obligations from American companies, Bloomberg Markets revealed.
The pension obligations MetLife absorbed might include those of the dying retailer Sears Holdings Corporation. Sears revenues fell by 22.22% during 3rd Quarter 2017 and has been selling off assets to cover expenses. Sears may have as many as 20,000 pensioners in the United States.
Retired Sears’ employees might be among those MetLife failed to pay. Such failure to pay can lead to expensive class-action lawsuits in the United States.
News of MetLife’s problems caused the company’s share price to fall from $54.77 on 26 January to $47.04 on 5 February. MetLife, or Metropolitan Life, is a major issuer of Life and other insurance policies in the United States. The company has been trying to raise cash over the past year by selling or spinning off subsidiaries such as Brighthouse Financial.
The problems at MetLife indicate serious structural weaknesses in the US insurance industry that might pose a threat to the American economy and insurance markets. Liquidity problems at another major US insurer, American International Group (AIG), helped trigger the global financial meltdown of 2007 and 2008.
At least other major US insurance company Prudential Financial Inc. is under strict oversight by the FSOC because of its finances, Reuters reported. Prudential is expected to ask for changes to regulations like MetLife did.