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Insurer Insolvency Under Federal Law

The 2008 Financial Crisis led to significant reforms of the financial services industry, most notably the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Enacted in 2010, Dodd-Frank primarily affects the banking industry, but it also includes provisions applicable to insurance companies, which have traditionally been regulated by individual state insurance departments. One such area is insurer insolvency, which has been regulated by the states since enactment of the Federal Bankruptcy Act of 1898. While Dodd-Frank does not usurp the states' authority in this regard, there is some potential for federal involvement in the insolvency of insurance companies that have been designated Systemically Important Financial Institutions (SIFIs) under Dodd-Frank. 

A company may be designated a SIFI by the Financial Stability Oversight Council (FSOC) based on considerations related to the size, interconnectedness, lack of substitutes, leverage, liquidity risk and maturity mismatch, and existing regulatory scrutiny applicable to the company. To date, four entities have been designated SIFIs: American International Group, Inc.; General Electric Capital Corporation, Inc.; Prudential Financial, Inc.; and MetLife, Inc. FSOC subsequently rescinded its designation of G.E. Capital following that company’s down-sizing, and MetLife successfully had its designation overturned in court.

Insurers that have been designated SIFIs, or which are part of groups that have been designated SIFIs, will experience some federal oversight if they become insolvent. This involvement is known as Orderly Liquidation Authority, and can be found in Title II of Dodd-Frank (12 U.S.C. § 5381 et seq.). Many issues are posed by the Orderly Liquidation Authority process, but first an overview of the process is in order.

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