Fed Governor Shows He's Thinking About the Life Insurers

Life insurers say the market-value changes are mostly irrelevant because they usually buy and hold bonds and other long-term assets through to maturity, but some observers have argued that, although life insurers are less exposed to sudden spikes in the need for cash than banks are, drops in the current market value of assets can hurt life insurers, too.

At the NAIC forum, Jefferson said he has concerns about prices, jobs and measuring the effect of Fed actions.

“On the one hand, inflation is too high, and we have not yet made sufficient progress on reducing it,” Jefferson said. “On the other hand, GDP has slowed considerably this year, and even though the effect has been muted in the labor market so far, demand clearly has begun to feel the effects of interest rates that are 5 percentage points higher than they were a little over a year ago.”

In the past, he said, monetary policy has worked with “long and variable lags.”

“A year is not a long enough period for demand to feel the full effect of higher interest rates,” he concluded.

The Fed and Reinsurance

Reinsurers are companies that protect insurance companies against their own losses.

The Fed has taken more interest in insurance oversight since the 2007-2009 Great Recession, when problems at financial services companies other than banks hurt banks.

Last year, the Fed developed a Framework for the Supervision of Insurance Organizations.

In the framework, officials emphasize that reinsurance arrangements can expose insurers to credit risk because of the possibility that the reinsurers might fail to make the expected payments.

In a set of questions designed to help regulators measure the complexity of an insurance organization, the Fed asks about “activities currently subject to no or limited regulatory oversight,” including “financial advisory services, distribution, investment origination/structuring, and some captive reinsurance arrangements.”

Elsewhere in the framework, officials say the use of reinsurance can add to an insurance organization’s complexity and hide risks.

Officials include an insurance organization’s “use of internal (captive) reinsurance, internal financing, and affiliate guarantees” in a set of organizational structure evaluation questions.

Philip Jefferson. (Photo: Federal Reserve Board)