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IAIS G-SII methodology a credit positive for the insurance industry, says Moody's

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The International Association of Insurance Commissioners’ (IAIS) newly proposed methodology for identifying too-big-to-fail insurers may have some companies fretting about new capital rules and a changing playing field, but it is a credit positive to U.S. rating agency Moody’s.

“Although we expect very few insurers to end up on a G-SII list, greater regulatory coordination and monitoring of large, higher-risk international insurance groups would be credit positive for the global insurance industry,” the report, published June 11, stated. 

U.S. companies such as Prudential Financial (Baa2 positive), MetLife (A3 stable), and AIG are likely to be on what we predict will be a very short (G-SII) list, said the Moody’s report, written by Laura Bazer, senior credit officer with the rating agency. These companies all are large, have significant insurance business abroad, and are likely candidates for non-bank SIFI designation in the U.S, as well, Bazer stated. 

Earlier, she had identified MetLife, AIG, Prudential, and Berkshire Hathaway as crossing the domestic systemically important total asset threshold, plus one or more additional thresholds but noted Warren Buffett’s company may not be considered a “nonbank financial company” under the Dodd-Frank guidelines.

The companies generally are staying publicly mum on both the IAIS and domestic systemically important designation methodology itself, while some have been vocal in seeing tightened standards and new perceptions as well as new regulators having deleterious effects for their product availability, affordability and their companies’ ability to expand.

Outside the U.S., Moody’s said that insurers such as Allianz SE (Aa3 negative), AXA (A2 negative) and Swiss Reinsurance Co. (A1 positive) would be subject to the evaluation process based on their size and global activity. 

However, the stated IAIS criteria reveal that size, international activity, and product complexity alone will not necessarily result in a disruption of the global financial system if an insurer encounters severe financial distress–it heavily weighs nontraditional insurance activities and includes among these variable annuities. 

The IAIS proposed its criteria to identify global systemically important insurers (G-SIIs or G-SIFIs in U.S. Insurance “slang”) on May 31, announcing an 18-point system divided into five categories.

The IAIS’s proposed methodology for identifying those companies whose financial distress would disrupt the global financial and economic system, is prepared under the purview of the Financial Stability Board and the G20.  

Moody’s quickly made a point in differentiating between the IAIS methodology and the U.S.’s approach under the Financial Stability Oversight Council (FSOC.)

Unlike the FSOC approach, “the IAIS methodology adds the criteria of international activity and type of activities an insurer engages in, recognizing the unique features of insurance, such as the long horizon of insurance liabilities, the concept of pooling of risks, insurable interest, and cash claims patterns,” Moody’s Bazer noted.

The bar for a G-SII will be necessarily much higher than for a U.S. SIFI, given that the disruption would be on a global, rather than a domestic, scale, Bazer wrote.

Although the IAIS has no regulatory authority as a body, it is rising as a global insurance supervisory force, as Moody’s notes.

“The IAIS has been popping up more frequently on the international regulatory scene, and has been making its opinions known. Its core principles, including those for improving enterprise risk management and introducing internal risk assessments, have found their way into the Own Risk and Solvency Assessment (ORSA) initiative that is now making its way toward passage by members of the National Association of Insurance Commissioners (NAIC)…Although the IAIS may not have much enforcement power on its own, its members include regulators from 190 jurisdictions (including the NAIC and individual US states), who have considerable influence on the insurers they regulate,” Bazer stated.

Both the IAIS and the FSOC do seek to identify groups whose distress or failure could hurt the financial system based on their size, interconnectedness to other players in financial system and lack of substitutability of their products and services, Bazer wrote. 

Back in November, a month after the FSOC first proposed guidelines on how “nonbank financial companies” could  be assessed to determine if they pose, or could pose, a threat to the stability of the US financial system, Moody’s Bazer also wrote that, “the greater regulatory oversight and more conservative financial and risk management requirements of these large, highly interconnected global financial institutions would be credit positive.” 

However, she noted at the time that details of enhanced SIFI supervision have yet to be established, and their full credit implications are still unknown, but in general, oversight would limit their ability to assume outsized risk, and thereby support their overall financial health, she wrote at the time.

To be sure, the IAIS is clearly insurance-industry centric while the FSOC looks at all financial institutions and financial utilities in its guidelines for determining SIFIs, as released in early April. This has some major players and state regulators concerned that bank-centric capital standards that reflect short-term liabilities and liquidity needs for banks will fall on SIFI designated U.S. insurers. 

The FSOC also has the statutory authority to not only recommend stricter standards for the largest, most interconnected firms, including nonbanks, designated by the FSOC for Federal Reserve supervision, but has a significant role in determining whether action should be taken to break up those firms that pose a “grave threat” to the financial stability of the United States, according to the Dodd-Frank Act regulatory reform statute. 

The G-SII designation list is not expected out until 2013, Moody’s said, while other reports have noted SIFI designations by the end of this year. However, other reports have the FSOC and the IAIS working together on timing and coordination of timing.

The FSOC’s proposed analytic framework for determining SIFIs is a three-stage process. In simplified terms provided by Moody’s last fall, in Stage One, the FSOC will apply a set of uniform quantitative “threshold” metrics to a broad group of nonbank financial companies. This step is intended to narrow the playing field and identify a smaller subset of institutions that are subject to further evaluation in Stage 2, where it is suspected the FSOC is now at or soon-to-be arriving. 

Stage Two involves a more in-depth analysis, using a broad range of public industry and company-specific quantitative and qualitative data, as well as any information provided voluntarily by the companies themselves.

Stage Three subjects companies to further qualitative and quantitative evaluation, based on company- specific information collected by the Office of Financial Research (OFR) or another regulatory agency.

It remains uncertain how, if an insurer is subject to both FSOC’s and the IAIS’  SIFI standards, and the capital standards conflict, what would be worked out for prudential supervision of the conglomerate, but from remarks made by regulators in Washington at conferences this year, it appears that great efforts are being made to work together.

Comments made by Federal Insurance Office Director (FIO) Michael McRaith at a forum in January suggested some alignment. “We–FIO–are working to develop an international process for designating globally systemically important insurers that aligns with the criteria and timing laid out by the [FSOC],” McRaith stated.

“FIO has been engaged in this discussion since July, and we have developed a solid working relationship with our international counterparts in this effort,” he stated at the Property/Casualty Insurance Joint Industry Forum in New York Jan. 10.  

In fact, McRaith at the time pointed to the fact that the IAIS has pushed back the date by which it will identify G-SIFIS to the FSB as evidence of this alignment process

  IAIS and FSOC Criteria Compared

The FSOC’s Six Category Assessment Framework uses these categories as the basis for the six proposed “threshold” metrics applied in Stage 1 testing

1. Size -threshold US-based companies that have at least $50 billion in total global consolidated assets, and foreign companies that have at least $50 billion in total US consolidated assets and which have size or exposure of certain high levels in derivatives, credit default swaps and other instruments and/or debt.

2. Interconnectedness



5.Liquidity and maturity mismatch 

6. Existing regulatory scrutiny.

The first three categories that attempt to evaluate the impact of a nonbank financial institution’s stress on the economy through its materiality, ability to transmit risk to other financial players, and replaceability, in the event of its failure. The latter three categories assess the company’s own vulnerability to financial distress.

 IAIS’ Proposed 18 Criteria for Identifying G-SIIs 

1. Total Assets

2. Total Revenues

3. Revenues derived outside of home country

4. Number of countries

5. Intra-financial assets

6. Intra-financial liabilities

7. Reinsurance

8. Derivatives

9. Large exposures

10. Turnover

11. Level 3 assets

12. Non-policyholder liabilities and non-insurance revenues

13. Derivatives trading

14. Short-term funding

15. Financial guarantees

16. Variable annuities

17. Intra-group commitments

18.Premiums for specific business lines


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