Insurance groups and CEOs are bristling against the global designation of insurers as Global Systemically Important Insurers (G-SIIs). A decision by the Financial Stability Board (FSB) is expected in or near the first quarter of 2013.
Insurers argue they carry much less systemic risk, even when very large, than any bank, and are different from banks and should not be treated as banks or it could upset the global economy in ways not contemplated by regulators.
Insurers are particularly concerned over the potential introduction of blanket capital requirements. A blanket capital surcharge on large global insurers would reduce the efficiency of risk pooling and lead to more expensive insurance, less risk capacity and, ultimately, greater reliance on state protection, said the Institute of International Finance Inc. (IIF).
“Because the traditional insurance business is not a source of systemic risk, it is important that any additional policy measures are specifically designed to focus only on those non-traditional and non-insurance activities that pose systemic risk,” said Steven A. Kandarian, vice chair of the IIF Insurance Regulatory Committee and CEO and chairman of MetLife. “A blanket capital surcharge may raise the cost of offering traditional insurance products and result in reduced availability of products currently meeting social needs.”
Proposed targeted capital increases on separated activities also have the potential to generate or aggravate systemic risk, according to major insurers.
The IIF encouraged the International Association of Insurance Supervisors (IAIS) to regard separation and targeted capital surcharges as measures of last resort, only to be considered after a specific assessment and identification of systemic relevant activities, and only after taking into account risk mitigation activities.
“Most non-traditional and non-insurance activities are closely linked to traditional insurance and complement each other without being systemically risky. A separation may eliminate the benefits resulting from such diversification,” the IIF stated.
The Property Casualty Insurers Association of America (PCI) told the group of insurance supervisors that reports to the FSB on G-SIIs, that IAIS’ proposals for increased regulation could harm G-SIIs and their consumers as they carry out their traditional insurance activities.
Additional capital at the group level as a capital add-on would be harmful to traditional insurance activities, as well as the policyholders they serve, according to the group, which responded to the IAIS Dec. 14.
PCI urged the IAIS to focus its proposed policy measures on systemically-risky activities.
AIG, and more companies than many are comfortable with, have been rounded up in data calls to examine whether they will trigger a G-SII designation.
Concurrently, the Financial Stability Oversight Council (FSOC), chaired by Treasury Secretary Timothy Geithner, is holding off designating AIG as a systemically important financial institution (SIFI), perhaps into next year, according to several sources.
The IIF urged the IAIS to undertake a comprehensive study to assess the potential impact of its proposals on the wider economy, and the ability for insurers to provide their services to the economy, similar to that undertaken by the Basel Committee on Banking Supervision and the BIS at the time of their proposals to address systemic risk in the banking sector.
In a meeting last week, it was anticipated that the FSOC would designate AIG as a SIFI, a domestic designation meaning it would come under the supervision of the Federal Reserve Board and be subject to enhanced capital requirements, liquidity requirements, short-term debt limits and public disclosures as mandated under the Dodd-Frank Act.
It is unclear if the processes for designating G-SII and SIFIs are being coordinated in terms of timing, as once suggested, and if so, to what extent. The criteria take markedly different approaches—all roads lead to more or enhanced capital requirements, but both processes are thought to envelope, at least for now, AIG and perhaps Prudential Financial and MetLife. Certainly they have been engaged in the process so far. Analysts at Washington Analysis have said Prudential will likely join AIG, MetLife and possibly the Hartford among insurance companies the FSOC is considering designating as SIFIs.
The Federal Insurance Office (FIO) is working with the IAIS on the “criteria, methodology and timing” of SIFI designations “so no U.S. insurer is disadvantaged through global designation of [SIFIs],” FIO Director Michael McRaith told House Financial Services subcommittee panel on Insurance, Housing and Community Opportunity on May 17.
The IAIS, operating under the direction of the FSB, is developing a methodology for the (G-SIIs). The IAIS concluded this summer that traditional reinsurance is unlikely to create or amplify systemic risk.
What constitutes systemically risky is still being debated, however. Some groups want non-traditional activities, which include variable annuities, removed from the systemically risky category, and only want non-insurance activities subject to heightened supervision.
PCI said that the activities that pose systemic risk should be more carefully defined, and only those activities should be included in the definition.
These measures should be directed at the few non-insurance and non-traditional insurance activities that are actually systemically important, and should aim to reduce the risk of those activities by improving risk management, rather than induce insurance groups not to engage in those activities, PCI said.
The measures should not be applied on a uniform, one-size-fits-all basis, but rather only as needed, based upon an individual G-SII’s particular circumstances. PCI wants the measures, as yet not fully known, to be used sparingly and that any additional capital requirements should be applied only to the activities that pose systemic risk.
“There should be a clear link between those activities and the measures designed to reduce their risk, and that definition should provide insurers the certainty needed to decide whether or not to engage in those activities,” PCI said.
The Geneva Association, an international insurance think tank made up of insurance CEOS from both life companies, reinsurers and property casualty companies, suggested to the IAIS a three-step process for applying policy measures to insurers in an escalating “ladder of intervention.”
The Geneva approach involves identifying non-traditional, non-insurance (NTNI) activities that are systemically relevant and weighing where they can be handled without further intervention, by the company’s existing governance system and “developing and promoting effective regulatory, supervisory and other financial sector policies to improve financial stability and address information gaps is vital to ensure the smooth functioning of the global financial sector,” said John H. Fitzpatrick, secretary general of The Geneva Association. Fitzpatrick is also on the board of AIG.
The Geneva Association’s recent Cross-Industry Benchmarking report sought to quantify and compare the systemic risk of banks versus insurers using comparable criteria required by the IAIS data calls.
It found that, among other things, insurers are significantly smaller than banks in most of the 17 indicators required by IAIS data calls.
The largest insurer would rank 22nd among globally systemically important banks (G-SIBs) , the Geneva Association research found.
With their significantly smaller amounts of short-term funding show, insurers are much less interconnected with the financial system than banks, the Geneva Association found.
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 research showed.
This benchmarking study is the first ever comparison between the 28 named G-SIBs and 28 of the largest global insurers.