New proposed policy measures for the world’s global systemically important insurers (G-SIIs) would push regulatory authorities to make structural changes throughout those companies in addition to possibly requiring more capital.
More than a few life insurance and property & casualty insurers have been asked to submit data for consideration of their status as G-SIIs based on such factors as their size and global activity, factors which some say reduce their risk and/or bring in too many companies that operate internationally that should not be under consideration. None have been named, but AIG, Prudential Financial, MetLife and some property & casualty companies and reinsurers are likely to be on the consideration list.
The International Association of Insurance Supervisors (IAIS) formally proposed a framework of policy measures for G-SIIs in line with the Financial Stability Board (FSB) recommendations today.
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 non-traditional and non-insurance activities from traditional insurance business.
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What constitutes non-traditional activities is the lynchpin of the undertaking, though.
Non-traditional 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 non-traditional insurance business. The property & casualty industry would be considered if non-traditional, non-insurance activities are extended to reinsurance or insurance of catastrophe risk.
“If insurers that do not pose a systemic risk (including property and casualty insurers) are swept into the definition of G-SIIs, these measures will unfairly and inappropriately impose on them restrictions, increased capital requirements and other burdens not shared by their competitors. The result will be an uneven playing field, less competition and higher costs, thereby actually harming consumers in the name of consumer protection,” said David Snyder, international affairs executive with the Property Casualty Insurers Association of America (PCI).
The life insurance industry stayed mum on the release today.
Insurers have suggested that the IAIS methodology incorporates a narrower and more precise list of non-traditional, non-insurance activities or they may have cause to exit/cease legitimate business activities and investments. Supervisors have acknowledged that there are non-traditional and non-insurance activities which are not systemically risky (for example, third party management), so some in the broader industry wonder what exactly a corporate restructuring would look like under a G-SII designation and mandate.
The three areas which G-SIIs will be subject to under the policy measures are 1) Enhanced supervision, 2) Effective resolution and 3) Higher loss absorption (HLA) capacity. The previous methodology ropes in 18 indicators 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.
“These proposed policy measures are intended to reduce moral hazard and the negative externalities stemming from the potential disorderly failure posed by a G-SII,” stated Peter Braumüller, chair of the IAIS Executive Committee. “Each of the proposed policy measures has also been designed to take account of the specific nature of the insurance business model and is the result of intensive and thorough discussion at the IAIS.”
HLA capacity will entail the supervisor requiring the G-SII to hold more regulatory capital or to increase loss absorption capacity by other means.
These are not strictly developed yet in any quantitative way nor are the Insurance Core Principles (ICPs), the common framework for supervision of internationally active insurance groups (ComFrame), and the FSB’s “Supervisory Intensity and Effectiveness” recommendations that would form the basis of the IAIS’s approach to enhanced supervision while special emphasis would be placed on group-wide supervision and liquidity planning.