Insurance companies large enough that their failure could disrupt the U.S. economy will face a familiar regulator as former Connecticut Insurance Commissioner Thomas R. Sullivan starts a newly created position next week at the U.S. Federal Reserve.
Sullivan, 52, will oversee capital requirements of non-bank financial institutions when he starts Monday as senior adviser to the Fed. It's a job with origins in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which Congress passed to prevent the sort of economic meltdown that led to plummeting equity markets, a recession, and widespread unemployment.
Dodd-Frank created a Financial Stability Oversight Council to identify companies too big to fail, such as American International Group, or AIG.
In his new role, Sullivan will supervise the Fed's capital requirements of AIG, General Electric Capital Corp. and Prudential Financial. All three companies were designated last year by the Financial Stability Oversight Council as "systemically important financial institutions," meaning too big to fail.
"Now, someone has to oversee them and regulate them, and that's the Fed," Sullivan told The Courant in a phone interview. "So, that's kind of where I come in as leading and contributing to the projects related to the regulation of those insurance firms that are designated by the FSOC."
He'll also oversee regulation of savings-and-loan holding companies that are owned by insurers. There are about 10 of those, including those affiliated with USAA, State Farm, TIAA-CREF and Nationwide, Sullivan said.
Neither the Fed nor Sullivan would set a time frame for establishing capital requirements. It's also not clear how strict the requirements will be.
However, some familiar issues will probably resurface. For example, Sullivan said the requirements are likely to address two capital-draining practices from the most recent financial crisis: investments into risky securities such as those backed by subprime mortgages before the real-estate bubble burst, and low-priced, generous guarantees on annuities and other products that saddled insurers with liabilities for years to come.
"The long-tail nature of liabilities and the guarantees associated with them, that's an obvious place to start," Sullivan said. He noted that insurers are pricing guarantees in a more sustainable manner.
Small State, Big Responsibility
If oversight of large companies seems a tall task, Sullivan said his role in Connecticut helped to prepare him. Connecticut's Insurance Department oversees financial solvency of companies headquartered here, which is a big part of the U.S. market — second only to New York in terms of written premiums.
"The oversight of that is important because the regulators in the others states relied on Connecticut to do all the supervisory and examinational oversight of the Connecticut firms," he said.
The Fed is not displacing state insurance regulators. State regulators have been vocal about the successes of state-based regulation of insurance rates, solvency, market conduct and other aspects of insurance.
"Some of you may be disappointed to hear this, but when it comes to insurance regulation, we, the states, are here to stay," Gov. Dannel P. Malloy said last month at the National Association of Insurance Commissioners' Annual International Insurance Forum in Washington, D.C.
The Fed's role is key for large multi-faceted companies that do more than just insurance. Additionally, Sullivan will lead activities at the International Association of Insurance Supervisors, a voluntary advisory group of insurance regulators and supervisors from more than 140 countries.
In this international role, Sullivan could have an important influence advising insurance regulators around the world, said Peter Kochenburger, executive director of the Insurance Law Center at the University of Connecticut School of Law.
"The Fed is not looking to review the solvency regulations that state insurance departments do, but they could easily become the dominant U.S. voice on international relations," Kochenburger said.
He added: "We look at Dodd-Frank, but there are efforts internationally all over the world to understand systemic risk not only nationally, but sometimes more important internationally. … One of the legacies of 2008 is an attempt to understand and to communicate, among national regulators around the world, systemic risk. And much of that is banking."
Sullivan's appointment was welcomed by regulators and some in the insurance industry.
"Tom's strong regulatory experience, comprehension of the insurance sector, and thorough understanding of America's national system of state-based insurance regulation will be a tremendous asset to the board on both domestic and international issues," NAIC President and North Dakota Insurance Commissioner Adam Hamm said in a statement.
The American Council of Life Insurers, a trade group, said in a statement that Sullivan "is a skilled insurance professional with a wealth of insurance experience."
"He will add significant depth and intellectual strength on insurance issues as he advises the Federal Reserve's Board of Governors," the council said. We will try to meet soon with Mr. Sullivan to discuss many issues, including capital standards for life insurers under the Fed's jurisdiction."
Connecticut Insurance Commissioner Thomas B. Leonardi said in a statement: "The Federal Reserve Board has made a solid appointment in choosing Thomas Sullivan, who has keen regulatory and industry insight. He understands the importance of state-based regulation, and the difference between banking and insurance. This is a great step forward that will benefit consumers and insurers."
Sullivan headed Connecticut's Insurance Department from the time he was appointed in 2007 by Gov. M. Jodi Rell until Nov. 12, 2010, when he took a position at PricewaterhouseCoopers LLP. He was a principal in the national financial-services regulatory practice at PricewaterhouseCoopers, assisting businesses in complying with federal finance regulation.
Before his role as commissioner, Sullivan was a senior vice president at Special Risk Services LLC, a third-party claims administrator that was a subsidiary of The Hartford Financial Services Group until it was sold in December 2010. He had 20 years of experience in property-casualty insurance before his appointment to head the Connecticut Insurance Department.