Insurers worry about measures to be applied to G-SIIs

IAIS met Jan. 14 in New Orleans to discuss measures to be applied to any insurer named a G-SII. (AP Photo/Judi Bottoni) IAIS met Jan. 14 in New Orleans to discuss measures to be applied to any insurer named a G-SII. (AP Photo/Judi Bottoni)

Insurers are concerned with many of the elements – some called “draconian” – that would be applied to any insurance company designated as a Global Systemically Important Insurer (G-SIIs), a subject explored at a recent meeting in New Orleans of the international body assessing insurers.

The International Association of Insurance Supervisors (IAIS) financial stability committee met on Jan. 14 in New Orleans to host a discussion on policy measures that would be applied to G-SIIs, although not much will be known on how the comments are received until the first, if any, G-SIIs are named. This move is expected in April, with annual designations thereafter expected each November, according to the IAIS timeline. Not all the policy measures will be implemented at once. Some measures won't kick in until 2019.

“There are many issues that need more definition and additional consultation will help avoid unintended negative consequences,” said David Snyder, vice president for international insurance policy at Property Casualty Insurers Association (PCI).

“For example, clarifying that insurance activities, whether traditional or not, do not pose systemic risk will help to avoid penalizing well managed and well regulated insurers as that will ultimately harm consumers,” Snyder said.

The concern is that the IAIS proposed policy measures might be applied part and parcel to parts of the business that are not systemically risky, with a whole set of restrictions and prohibitions on conducting business that are draconian, Snyder explained by phone after the meeting.

As for the policy measures on insurers, sanctions for systemic risk should be directed toward those activities that are systemically risky, Geneva Association Secretary General John H. Fitzpatrick said last week to National Underwriter, the sentiment echoed later at the IAIS conference in New Orleans. 

Of course, the bank regulatory-heavy Financial Standards Board (FSB) will ultimately decide on G-SIIs, and most insurers believe – along with the IAIS, – that insurers are not by and large systemically risky, especially when compared to the largest banks.

To that end, the global insurance industry think tank Geneva Association conducted a benchmark study called the Cross-Industry Analysis—28 G-SIBs vs. 28 Insurers, Comparison of systemic risk indicators.

This study compares the named 28 Global Systemically Important Banks (G-SIBs) and 28 of the world’s largest insurers on indicators of systemic risk.

The benchmark study takes 17 indicators required by the IAIS data calls that are comparable between insurers and banks to provide an analysis of the size of each activity.

For example, the average bank is 3.9 times larger than the average insurer and the average bank is 158 times the average insurer on credit default swaps (CDS) sold, the study revealed. The largest global insurer would rank only as the 22nd largest G-SIB.

“These 17 indicators show that insurers are significantly smaller than banks in most of the 17 indicators, and that there are large gaps in measurements along many metrics between the smallest of the 28 identified banks and the largest of the insurers,” the study stated.

“It should be noted that insurers match assets with liabilities and are thus less exposed than banks to the systemic risk of maturity transformation (borrowing short to lend long) and carry substantially lower positions in derivatives,” the study, released in December, stated.

Significantly smaller amounts of short-term funding show that insurers are much less interconnected with the financial system than banks, the Geneva Association, which counts top insurance company executives as members, has said. 

"The origin of this study," said Fitzpatrick in an interview, "is that I’ve been sitting in a number of meetings where there’s the various representatives of the FSB and the IAIS considering the methodology to name G-SIIs, and the insurance industry reps would argue that insurers are different, and policymakers would say, ‘yes, we understand. Next question.’”

“There was no progress on either side,” said Fitzpatrick, who is also an AIG board member. 

“We also believe strongly – it is very important that the regulatory system globally – that every insurance/bank organization has a strong lead regulator and the authority to look at every subsidiary within a group. ... If this was in place, one could argue that AIG would not have been able to take the risk it did with its subsidiary,” Fitzpatrick said.

Activities that cause systemic importance of G-SIIs will prompt the national authorities — in the U.S. it would be the home regulator, the state or the Federal Reserve under certain Dodd-Frank Act provisions — to take necessary measures to reduce that systemic importance. This includes development and implementation of a Systemic Risk Reduction Plan (SRRP), which could include measures such as the separation of nontraditional and noninsurance activities from traditional insurance business.

What constitutes nontraditional activities is the lynchpin of the undertaking, though.

Nontraditional activities are discussed in the IAIS proposed methodology and the life insurance industry in multiple countries has, for example, the assessment methodology classifying variable annuities as a nontraditional insurance business. The property and casualty industry would be considered if nontraditional, noninsurance activities are extended to reinsurance or insurance of catastrophe risk.

"All of the evidence is that the insurance market is sound and competitive despite huge challenges. To maintain this excellent condition, PCI urges further dialogue before the G-SII methodology and policy measures are finalized. PCI is committed to continuing to work with IAIS on this important matter," Snyder stated.

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