Insurers worry about measures to be applied to G-SIIs

“These 17 indicators show that insurers are significantly smaller than banks in most of the 17 indicators, and that there are large gaps in measurements along many metrics between the smallest of the 28 identified banks and the largest of the insurers,” the study stated.

“It should be noted that 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 study, released in December, stated.

Significantly smaller amounts of short-term funding show that insurers are much less interconnected with the financial system than banks, the Geneva Association, which counts top insurance company executives as members, has said. 

“The origin of this study,” said Fitzpatrick in an interview, “is that I’ve been sitting in a number of meetings where there’s the various representatives of the FSB and the IAIS considering the methodology to name G-SIIs, and the insurance industry reps would argue that insurers are different, and policymakers would say, ‘yes, we understand. Next question.’”

“There was no progress on either side,” said Fitzpatrick, who is also an AIG board member. 

“We also believe strongly – it is very important that the regulatory system globally – that every insurance/bank organization has a strong lead regulator and the authority to look at every subsidiary within a group. … If this was in place, one could argue that AIG would not have been able to take the risk it did with its subsidiary,” Fitzpatrick said.

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 nontraditional and noninsurance activities from traditional insurance business.

What constitutes nontraditional activities is the lynchpin of the undertaking, though.

Nontraditional 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 nontraditional insurance business. The property and casualty industry would be considered if nontraditional, noninsurance activities are extended to reinsurance or insurance of catastrophe risk.

“All of the evidence is that the insurance market is sound and competitive despite huge challenges. To maintain this excellent condition, PCI urges further dialogue before the G-SII methodology and policy measures are finalized. PCI is committed to continuing to work with IAIS on this important matter,” Snyder stated.