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July 31, 2012 at 08:56 AM
The International Association of Insurance Supervisors (IAIS) should remove traditional insurance activities in determining its methodology for identifying globally systemically important insurers (G-SIIs or G-SIFIs) that may be misclassified, the Geneva Association wrote in comments submitted today to the IAIS.
Traditional insurance features too prominently in the IAIS indicators, creating a situation that could result in non-risky insurers being designated as systemically risky and systemically risky insurers avoiding designation, the Geneva Association warned.
Another big concern is the unintended consequence of the methodology actually creating an obstacle for governments and banks to borrow.
The inclusion of traditional insurance activities in “large exposures” means that the considerable holdings of government bonds and bank-issued securities owned by insurers would be subject to one of the indicators of systemically risky institutions.
An IAIS G-SII assessment judges large concentrations of risk in the investment portfolios.
Insurers are big investors in government bonds, bank debt, and other bank securities. One unintended consequence: Insurers seeking to avoid the systematically risky designation would reduce their bank-issued securities, government bonds and investments in bank securities, John H. Fitzpatrick, secretary general of The Geneva Association, tells National Underwriter. The reduction would contribute toward instability, he warned, noting that there all indicators, when final, will trigger actions by insurers to reduce their risk profile.
“The criteria that is settled on is very important because whatever criteria is finally agreed to will cause actions by companies to mitigate their exposure, says Fitzpatrick, a Chicago-based American who will be heading up the association from its headquarters in Geneva, and who spoke today to NU from Munich. Fitzpatrick, who is also a non-executive member of the board of AIG, is helping the company to repay its debt to the U.S. Treasury.
Fitzpatrick warned that the IAIS methodology, if not changed, could result in behaviors to reduce systemic risk that would not be beneficial for the financial system. For example, to manage their systemic risk ranking, insurers may seek to adjust their holdings in important assets, making it harder for banks and governments to refinance.
The Swiss-based Geneva Association membership comprises a statutory maximum of 90 chief executive officers from the world’s top insurance and reinsurance companies. The U.S. company CEOs involved in this report include those from Prudential, MetLife, New York Life, Liberty Mutual, AIG, RGA and The Hartford, as well as, in Bermuda, Ace, Arch, Axis, Renaissance and XL.
MetLife is trying to sell its bank so as not to be classified a domestic systemically important financial institution, or SIFI, under the Dodd-Frank Act, by the Treasury-led Financial Stability Oversight Council.
Companies such as Prudential Financial (Baa2 positive), MetLife (A3 stable), and AIG are likely to be on what Moody’s predicts will be a very short (G-SII) list, states Moody’s analyst Laura Bazer, a 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 wrote in June.
The IAIS’s Assessment Methodology for the Identification of Global Systemically Important Insurers, was issued May 31, 2012, with an 18-point methodology system for identifying G-SIIs. The project is part of a G-20 initiative to better supervise the global financial system after the AIG event that roiled the world markets in 2008. The 18 indicators were grouped into five weighted categories which the Basel-based global insurance supervisory body will use to assess insurers to determine whether they are systemically risky.
The largest consideration will be given, by far, not to size but to nontraditional insurance activities and interconnectedness, according to a breakdown of all factors.
