Page 3 Profile
Frank Keating
Legislating reform
by Carolyn S. Ellis
Frank Keating has been president and CEO of the American Council of Life Insurers (ACLI) since 2003. He previously served two terms as Oklahoma's 25th governor, during which time the Alfred P. Murrah Federal building in Oklahoma City was bombed (1995).
ACLI comprises 300 life insurance companies that operate in the U.S. and account for 90 percent of assets and premium. As their trade association, ACLI is a bipartisan advocate for its members and their policyholders. In the development of current financial services reform legislation, Keating and his staff have been active in helping Congress understand how life insurers differ from banks. L&HA spoke with Governor Keating about the impact of several provisions in the new legislation.
L&HA: Financial regulatory reform legislation comes at a time when the insurance industry is looking for strategies and products that will enable Americans today, as we look to 30 or more non-working years, to convert retirement savings into lifetime income. It appears that the provisions of HR4173 and S3217 may complicate that picture. Please comment.
FK: I think there's recognition in Congress that life insurers were not the cause of the financial meltdown of 2008 so we were not a major focus of the legislation. A lot still needs to be worked out in the regulations, and while the life insurance industry may be caught up in some aspects of the final rules, we will work to ensure that companies, agents and our customers won't be unduly harmed by it. And nothing about the bill changes the industry's main focus of helping Americans reach their financial and retirement security goals.
L&HA: What aspects of the reform legislation that concern ACLI members are most important for financial advisors to understand?
FK: A challenge we commonly face in Washington is educating members of Congress about how we differ from banks and other financial institutions in services we provide to our customers. In many ways, we succeeded in doing that while this legislation was being written. Still, the bill represents a very bank-centered approach toÝreform and that's something we'll have to keep an eye on as the regulations are written.
For agents and brokers, the most relevant part of the bill is the study on fiduciary standards. The legislation directs the SEC to study the similarities and differences regarding regulation of broker-dealers and investment advisers when providing investment advice about securities. The SEC will report its findings in six months and will consider next steps after that. We're working closely with our friends at the National Association of Insurance and Financial Advisors.
L&HA: There are several provisions of the legislation that ACLI has been actively following. They include the $150 billion pre-funded resolution authority for the FDIC and the provision to take a lien on assets owned by subsidiaries downstream from the insurance company. How do these provisions affect your constituency?
FK: In the version that passed out of conference committee, the resolution authority is now a post-event funded regime, that is, it will assess financial firms following companies' resolution.
Life insurers are required under state laws to participate in guaranty associations in every jurisdiction where they are licensed to do business. These associations have the authority following the insolvency of an insurance company to impose assessments on licensed insurers to assure policyholder claims against the insolvent company are paid to the limits of the law. Although life insurers may be subject to assessments following a financial company's resolution under the new federal authority, it is unclear how they may be assessed. In addition, the new law makes clear that insurance company insolvencies will continue to be resolved under state law. The FDIC could only step in to wind down a systemically important insurance company if the insurance commissioner where the insurer is domiciled fails to take appropriate actions. We believe this scenario is highly unlikely.
L&HA: Could you comment on The Volcker Rule?
ÝFK: Anyone involved in the insurance industry knows well that we are one of the most risk-adverse of the financial services industries. And with good reason. We make promises that may not come due for 20, 30 or even 40 years, and we make investments to ensure we can do that.
The Volcker Rule was never intended to affect us. It was originally aimed at prohibiting insured depository institutions from engaging in excessively risky investment activities for their own accounts. Over the course of the debate, some members of Congress expanded the Volcker Rule beyond its original intent and applied proprietary trading and hedging restrictions not just to the depository institution, but to all subsidiaries and affiliates within a holding company that includes a depository institution.
Due to lack of understanding of our industry by some policymakers, the industry was initially concerned about the effect this rule would have on life insurers who are part of bank or thrift holding companies. However, under the final bill, life insurers will not be subject to the proprietary trading prohibitions if the trades originate from general accounts or are done on behalf of customers, like companies do in their separate accounts, accounts segregated from funds in insurers' general accounts. We will continue to closely monitor developments with the Volcker Rule through the rulemaking process.
L&HA: How about derivatives, including swaps?
FK: Life insurers use derivatives to reduce risks they assume in protecting policyholders. Life insurers must prepare for claims which may not arise for 40 years or more and derivatives are indispensable in this process. Insurers' use of derivatives does not constitute a systemic risk. Plus, insurers' use of derivatives is strictly and conservatively regulated under state insurance laws and regulations.
The legislation assigns the SEC and CFTC with responsibility for addressing ACLI's key concerns, such as the clearinghouse requirement (whether insurers' swap activities must be traded through a clearinghouse or exchange) and the definitions of "major swap participant" and "major security-based swap participant."We're confident we can make a strong case to the SEC and CFTC on how life insurers use derivatives to reduce risk and why we should be excluded from the definitions of "major swap participant" and "major security-based swap participant."
L&HA: What do you expect will happen with the Collins Amendment?
FK: To use a clichÈ, the Collins Amendment is an attempt to fit a square peg into a round hole. It would establish higher requirements for "Tier 1" capital for financial institutions that pose systemic risks. The amendment could apply to life insurers even though life insurers calculate risk-based capital much differently than banks. Risk-based capital rules are different for life insurers than for banks because life insurers address different types of risks.
This an example of Congress applying bank-centered policy initiatives to the life insurance industry, even though these initiatives are not intended for life insurers and are wholly inappropriate in that context. This is a point we will work to emphasize during the rule-making process.
L&HA: What is ACLI's position on the Federal Insurance Office, or the Office of National Insurance?
FK: ACLI strongly supports the creation of the FIO, which will for the first time provide for a federal government office within Treasury with expertise in insurance to advise Congress and the Administration on insurance-related issues and to help negotiate international regulatory equivalency agreements.
It's important to note that the office is not a regulator but an information-gathering body. Regulation of insurance will remain with the states.
L&HA: How do various provisions of H. R. 4173 and S. 3217 potentially compromise or impact fiduciary duty?
FK: .The legislation directs the SEC to study the similarities and differences regarding regulation of broker-dealers and investment advisers when providing investment advice about securities, and to submit a report to Congress within six months of enactment. The SEC is authorized to address the standard of care through rulemaking, subject to the findings, conclusions and recommendations of the study.
L&HA: What can agents and brokers tell clients who might be concerned about the reforms? Is there anything that individual financial professionals can or should do in the coming months?
FK: For consumers looking to the industry for financial protection, lifetime income and other financial services we provide, the message is simple: there is no change. The reforms in this bill were aimed at activities that contributed to the financial meltdown in 2008. Life insurers back their commitments with stable, conservative investments. Our products were not responsible for the meltdown and not a focus of the legislation.
L&HA: President Obama has announced plans to promote the use of annuities as vehicles for Americans to supplement Social Security. Is this initiative challenged by the proposed financial reform? Will annuity sales be affected?
FK: First of all, I think it's significant that the Administration is giving so much attention to benefits of annuities in retirement planning. In addition to the plans you mention, the Treasury Department and Department of Labor are in the middle of exploring how to provide workers with lifetime income options in their defined contribution plans. Obviously, annuities are a major part of that discussion.
Life insurance products, including annuities, are not seen as a cause of the financial meltdown. Indeed, as evidenced by the Administration's activities, regulators appear to be viewing annuities as potentially important retirement security tools. There doesn't appear to be anything in the financial reform bill that would affect their role in retirement planning.
L&HA: Considering your remarkable career in public service, are you optimistic about these financial reforms?
FK: I recognize the extraordinary effort that went into developing legislation to reform financial regulation in the United States. In particular, the leadership of Senate Banking Committee Chairman Chris Dodd (D-CT), House Financial Services Committee Chairman Barney Frank (D-MA), Ranking Senate Banking Committee Member Richard Shelby (R-AL) and Ranking Financial Services Committee Member Spencer Bachus (R-AL) needs to be acknowledged.
The bill is long, complex and comprehensive, but its effectiveness will ultimately be determined by the estimated 300-plus new rulemaking provisions and 68 studies called for in the legislation. For the life insurance industry, we need to continue our vigilance and work to ensure the final regulations are in the best interest of our policyholders.Ý
L&HA: You're planning to step down soon as head of the American Council of Life Insurers. How does this bill fit into your insurance career?
FK: When I first came to ACLI, I wanted to make sure that we weren't identified with one political party. As an industry, our mission to provide financial and retirement security to all Americans resonates with Republicans and Democrats. We needed to be sure to communicate our concerns across political aisles.
Early in my tenure here, Republicans were in charge of the White House and Congress. But as happens in Washington, control gradually shifted to the Democrats. Because of our bipartisan nature, this transition did not affect us. I think the financial regulatory reform bill shows the benefits of this approach.
As a state-regulated business, there are not many in Washington who spend much time thinking about the life insurance industry. So during the debate on the bill, we spent a lot of time educating Democrats and Republicans on how this complex bill could have affected our industry. We were able to do this in large part because of our bipartisan strategy.