The process for designating significantly important insurers in the US has been branded "flawed" and contradictory by members of the body charged with overseeing the process.
The criticism came as Prudential Financial lost its appeal against its proposed determination as a non-bank systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC). US insurance regulators also weighed in saying that the decision demonstrates the FSOC's lack of understanding of the insurance industry and the regulatory procedures designed to prevent a disorderly collapse of an insurer.
Last week, FSOC members voted by a majority of seven to two to uphold the determination and designate Prudential Financial a non-bank SIFI. The decision prompted three council members – two voting members and one non-voting member – to write forceful dissenting opinions denouncing Prudential Financial's designation and criticising the assessment criteria.
John Huff, the non-voting state insurance commissioner representative on the FSOC, and director of the Missouri department of insurance, argued that the basis for the final determination was "flawed, insufficient and unsupportable" since it applied bank-like concepts to insurance products and their regulation. The FSOC's designation basis, he argued, "mischaracterises" or ignores existing regulatory procedures designed to prevent a disorderly collapse of an insurer and limit any contagion effects.
Concerns were also raised that Prudential Financial's size was the driving factor behind its designation, despite the fact the assessment basis is meant to consider a firm's interconnectedness, risk concentration, and financial activities as well. The FSOC's belief that Prudential Financial could face a run on its policies, which could lead to destructive asset liquidation, was dismissed as fantasy by the dissenting members.
Prudential Financial now has 30 days in which to file an appeal against the decision in federal court. In a statement, the firm said it was reviewing the rationale behind the determination and exploring its options.
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