World insurance regulators should keep tabs on insurance company affiliates, not just the entities that they happen to regulate.
Officials at the Interational Association of Insurance Supervisors, Basel, Switzerland, present that thought in a description of key features of a possible “comprehensive approach” to supervising corporate groups that include insurance companies.
The authors of the IAIS white paper note that they prepared it partly in response to the example set by the problems at American International Group Inc., New York (NYSE:AIG).
The authors cover topics such as direct oversight over non-regulated entities affiliated with regulated insurers, indirect approaches, and “ring-fencing” approaches, such as efforts to grapple with an unknown level of risk in cases in which “relevant information about an entity is not available, or where it is not practical to impose direct or indirect capital or other requirements on such entities.”
“In these circumstances,” the authors of the paper write, “the financial risks to the group can be partially addressed by deducting from group capital adequacy the value of the group’s interest in those entities whilst on the other hand imposition of direct limits on exposures can be used. However it should be recognised that ring-fencing may not isolate insurance entities from all contagion risks (e.g. reputation risk). Therefore insurance supervisors should make every effort to gather information on all non-regulated group entities.”
Regulators should try to have a broad understanding of the affiliates of the companies they regulate, and to ensure that senior managers and board members of a regulated insurer understand all of the risks they are taking and are managing that risk in a proper way, the authors of the paper write.