Wide-ranging financial industry deregulation under President-elect Donald Trump could benefit large insurers, particularly those such as AIG and others deemed as systemically important under current rules, Fitch Ratings said in a new report.
“Fitch believes a Trump administration could promote a quick pullback on insurance [systemically important financial institutions] via a less inclusive approach…,” the ratings agency said in a Nov. 21 update.
Changes to the Federal Insurance Office and the broader tax code could also leave larger insurers with less regulatory pressure as well as financial gains, Fitch said.
The Dodd-Frank Act, passed after the 2007-2008 global financial collapse, allowed for creation of the Financial Stability Oversight Council, which determined AIG, Prudential, and MetLife to be among systemically important financial institutions, mandating that they have higher capital reserve standards.
Fitch said it expects potential repeal or amendment of Dodd-Frank, which could lead to a Trump administration pullback on the insurers’ special standards if the Dodd-Frank law is changed or new leadership comes in at the FSOC.
Another reason change could be afoot in this area: MetLife won a March court ruling that took away its special “systemically important financial institution” designation. Fitch notes that “the Trump administration may choose not to follow through on appeal.”
In terms of Dodd-Frank, Standard & Poor’s said in a Nov. 16 report that it expects the incoming administration to “try to halt certain new regulations.” However, the S&P report stated that overhauling Dodd-Frank and other large deregulatory efforts “would be more difficult and require Congressional approval.”
Deregulation “could support the earnings of financial institutions but would be a credit negative if it weakens capital or liquidity standards of resolution planning,” the Standard & Poor’s report added.
S&P noted, however, that uncertainty remains about how Trump will handle the issue.
“We are uncertain how the President-elect will prioritize financial industry deregulation compared with his other stated priorities” such as immigration and health care, “and exactly how significant any loosening of regulations could be,” S&P said.
Fitch, aside from its speculation about Dodd-Frank, said it also expects financial deregulation could touch the Federal Insurance Office, a Dodd-Frank creation.
“The FIO could have a reduced or modified role under broader policy initiatives to lessen financial regulatory burden and to take a more US-focused approach generally,” Fitch said. “The result could reduce the prioritization of participating in international insurance regulatory initiatives.”
Fitch added it also expects tax code changes to reach the insurance sector, with some companies that shift businesses off-shore to take advantage of lower taxes.
“This could be de-incentivized under a lower corporate tax rate,” Fitch said.
Sources: Fitch Ratings, Standard & Poor’s