Trying to fit an insurance company through the optics of a bank centric approach does not work according to the head of State Farm Insurance. Ed Rust Junior shows signs of chafing under a law that is supposed to prevent a Great Recession from happening again. Six years after the height of the financial crisis, many of the rules called for in the regulation known as the Dodd-Frank law have yet to be written. During a recent public appearance in Bloomington, Rust said he hopes Congressional clarification will eventually provide the Federal Reserve the flexibility to address issues.
"At times this is rather challenging as the business of insurance does not fit nicely into traditional bank-centric rules."
Rust says the Federal Reserve is all about safety, soundness, capital strength and capital adequacy. Insurance markets are still largely regulated at the state level and he says they focus on making insurance rates affordable and policies widely available. Rust says those tend to be diametrically opposed principles.
About half the regulatory package of rules has yet to be written, several years after passage of the law. In some instances, Rust says it is proving an uncomfortable synthesis
"There are still major things around derivatives. We think recent interpretation, what we do is not really do is not derivatives but, would exclude insurance companies from that." (Reporter: Are they trying to say you are acting like a derivative?) No they are trying to work through that and kind of avoid unintended consequences."
Rust also joins many in the banking industry saying the Dodd-Frank law's increased requirements for capital reserves will encourage a wave of consolidations.
"I am afraid you will see the growing pressure on a lot of smaller financial institutions to merge or to come together in whatever form to basically address some of the compliance regulatory overhead."
State Farm Bank is among the 100 largest thrifts in the nation. But, Rust says it is even possible the cost to comply with the adequacy requirements could be burdensome enough that it would not be worth State Farm's effort to maintain the bank as a complement to its other lines of business.
"There could be a hypothetical out there, but I don't have a number."
Rust says debate in Congress has also begun about exempting certain institutions from the regulation. Rust also says he hopes the Federal reserve works through rule making in a way that will prevent unintended consequences for insurance companies. He says there is a conflict between Fed emphasis on security and capital adequacy and common insurance regulators who limit rates and require wide policy availability.
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